Benchmarking for success

GRESB Infrastructure director Rick Walters tells Amy Carroll how measuring ESG performance can help guide the way to a fully sustainable infrastructure industry.

Q: What is GRESB Infrastructure’s mission?

RW: GRESB Infrastructure is following in the footsteps of GRESB Real Estate in assessing the sustainability performance of infrastructure portfolios and assets across the world. Through that, we offer ESG data, scorecards, benchmark reports and portfolio-analysis tools. As an organisation, our mission is sustainable real assets. For GRESB Infrastructure, that means playing our part in creating a fully sustainable infrastructure industry. That’s our goal.

Q: What are the most important metrics by which you assess ESG performance in the sector?

RW: In creating the frameworks for GRESB Infrastructure, we have been guided by what investors in the industry consider to be the most material issues.

When it comes to the management and policy aspects of the assessment, the indicators are quite similar to real estate. For the performance aspects, we currently have seven indicators covering health and safety, energy, greenhouse gas emissions, water, waste, air pollution and biodiversity.

One challenge we have had is that infrastructure is a highly diverse asset class. For that reason, we introduced a materiality assessment into the process for the first time this year. This works by using default sector materiality weightings for the various environmental, social and governance issues, and it means that the wide range of issues and indicators we use are narrowed down to those most relevant for each participant.

Q: Why is measuring sustainable investment important for the infrastructure asset class?

RW: Infrastructure is essential to society and is shaped by a lot of the major trends of our times – urbanisation, demographic change, restraints in resources, environmental impact, emerging technologies. In many ways, it is even more important to measure and benchmark ESG in this industry than in real estate, because of its direct link to those challenges. Put simply, those challenges are so great we can’t afford to get it wrong.

Q: How successful has the industry been so far when it comes to implementing sustainable investment practices?

RW: GRESB Infrastructure has been going for three years. We will be releasing our third-year results in September. Over that time, we have seen considerable growth in participation. But, in terms of implementation of practices, it is a mixed picture at this stage, which is to be expected. There are some leaders among investors and their managers doing really great work and there are also many, who are fairly early on in their journey, still grappling with how to address ESG issues. What is good, is that it has certainly become more mainstream and I think our assessments and pressure from investors are helping to accelerate that process. We have seen improvement from most participants in terms of performance. They are generally getting better and better scores. We have also seen very low churn, which suggests what we are doing is useful to people.

It is certainly pleasing to see the discussion has moved on from, ‘What is this ESG, sustainability thing?’ to, ‘How do we address this?’ We are in a far better place.

Q: How does the infrastructure industry compare with real estate in terms of its willingness to embrace sustainable investment practices? And how has GRESB’s approach differed?

RW: In many ways, we are following the real estate journey. GRESB Real Estate started out eight years ago – we started three years ago. You could say we are five years behind, but we have had the advantage of them going first. We have been able to learn from what they have done. There are also quite a few differences in terms of the sectors and the whole direct link that infrastructure has to many of the ESG challenges in society. That is great because it drives the industry harder and further.

Q: What is the biggest challenge that infrastructure faces when it comes to implementing sustainable practices?

RW: There are certainly some issues holding the industry back. I would say capability and capacity is one. There has been progress but there is still a lack of strong understanding and skills in organisations. Knowledge tends to be in the heads of just a few individuals. Silos are also a problem. Many infrastructure organisations are large and complex, and it can be difficult and time-consuming for the responsible-investment head to convince their many portfolio managers of the need to change and better address ESG.

I think the GRESB assessment can help with that because suddenly there’s an important stakeholder – the investor – who is highly interested in ESG performance. That helps take the issue from the periphery to centre stage.

Other issues the industry is facing include government instability, short election cycles and the rise of populism. That all means increased sovereign risk for investors in some countries. Projects can be started and stopped on a whim and laws can be changed quickly when new parties are in power. Examples include the [proposed] nationalisation of UK railways and the cancelling of projects like the East West Link in Australia. It makes it harder for investors to look at the long term and ESG requires a long-term view.

Q: To what extent is ESG performance guiding institutional investor decision-making in practice?

RW: Again, we see a range of attitudes but there is definitely a trend towards stronger consideration of ESG in decision-making. In terms of GRESB, more and more investors are encouraging or even requiring participation. This year we have seen a 75 per cent increase.

As well as being demanding of managers, investors are expecting more from GRESB as well. There is growing demand for solutions to show progress to their customers and stakeholders. Ultimately, this is driven by the customers of the institutional investors, the mums and dads who want to know their pension is being used for an appropriate purpose.

Q: Where will GRESB Infrastructure, and the sector it assesses, be in 10 years’ time?

RW: If I imagine 2028, the industry will be well on the way to that vision of sustainable infrastructure. For investors and managers, that means full integration of ESG into all processes and decision-making. ESG will have moved from being purely the responsibility of the responsible-investment person to being part of everyone’s role. Investment decisions will have already driven much change, including divestment of assets that are too risky in a low-carbon world, for example. Renewables will dominate the energy sector and most assets will have moved towards being net zero carbon.

In terms of how GRESB will support this transformation, we are currently developing a medium-term plan with three closely related roadmaps covering standards, stakeholders and technology. Regarding participation, we expect to see near full coverage of the industry. Government infrastructure will also start to report to GRESB, providing similar benefits for them and strengthening the overall benchmarks with wider participation. Emerging markets will have also started to report in earnest and this will hopefully help facilitate the flow of capital to where it is much needed, by reducing risk and encouraging investment.

We will have seen metrics become standardised for GRESB and other frameworks across the sector. This will reduce reporting burden and lower complexity and confusion. The inputs and outputs will become increasingly flexible for the user and metrics will measure performance, not just transparency. Year-on-year, we’ll be tracking progress towards the goal of sustainable infrastructure and making adjustments to performance indicators to keep the industry on track.