This article is sponsored by Deutsche Bank
The arrival of covid-19 this year and the economic, social and climate-related havoc it has brought with it have only served to focus minds even further on sustainability-related issues. And as investors in projects that provide economic and social benefit, infrastructure funds have a particularly important role to play in helping economies build back better at a time when public finances are stretched.
Against this backdrop, Infrastructure Investor spoke to Thalia Delahayes, head of the project finance agency service in the US at Deutsche Bank, and her colleague, Henrike Pfannenberg, head of the environmental, social and governance competence centre at Deutsche Bank’s corporate banking division, to get their take on recent trends, the role of sustainable finance in infrastructure and the importance of aligned thinking around sustainability when it comes to partnering with corporate trust service providers.
What are you seeing in terms of ESG trends among infrastructure funds and their investors?
Thalia Delahayes: ESG is becoming increasingly important to both funds and their investors – every year we see more investors incorporating ESG targets into their investment decisions. This is backed up by Deutsche Bank Global Markets Research, which suggests that by the end of 2020 close to 50 percent of global assets under management will incorporate ESG factors. With current growth rates, potentially 95 percent of global AUM – that’s $130 trillion – will have an implicit or explicit ESG mandate by 2030.
Today, more than 3,000 investors have signed the Principles for Responsible Investment and it looks as though the pandemic will have brought the issue of sustainability even more to the fore. During the peak of the covid-19 crisis, for example, three of the world’s largest pension funds – CalSTRS in the US, the Government Pension Investment Fund in Japan and the USS Investment Management Fund in the UK – published a joint statement stressing the importance of companies and investors maintaining their focus on long-term sustainability goals.
Henrike Pfannenberg: And it’s against this broader growth in ESG assets under management that we are seeing infrastructure funds and their investors increase their focus on ESG and impact. We saw this happen at an earlier stage in public markets – first equity, then in fixed income and now in alternatives as the last frontier.
There is now a big push for measuring funds’ investment impact around the UN Sustainable Development Goals – the industry is really coalescing around these. With goals ranging from affordable, clean energy to good health and wellbeing and building resilient infrastructure, infrastructure funds are perfectly placed to create real impact on achieving a number of these. The UN has calculated there is an annual global $2.5 trillion funding gap if these goals are to be met – infrastructure funds can clearly play a role here.
What do you see as the primary drivers for these trends?
HP: One of the most important drivers is an increasing recognition that ESG investment makes sense, not only to broader stakeholders, but also in economic terms. There is growing empirical evidence that incorporating ESG-related information into decision-making enhances the risk-return considerations for specific investments. Therefore, investors are increasingly asking for ESG data.
Covid-19 has only added to this. There is a growing number of studies that demonstrate the financial benefits that stem from effective ESG integration – the ESG leaders clearly outperformed comparable benchmarks through the crisis. Regulatory frameworks are also driving these trends, particularly in Europe, as there is a growing understanding that public spending won’t be sufficient if the SDGs or, for example, the Paris Climate Agreement are to be met.
There is a focus on leveraging private sources of capital to help bridge the funding gap.
How else do you think the pandemic played into this?
HP: The pandemic has moved us closer to a stakeholder economy. There are more conversations now about the purpose of companies and we’re seeing ESG factors have a material effect on their relationships with all stakeholders. Furthermore, the pandemic has brought into sharp focus the fact that E, S and G are all interlinked, such as the social impact of pollution or the loss of biodiversity.
TD: Climate change is becoming increasingly visible with unprecedented forest fires and record-breaking temperatures in areas such as Siberia, and again the pandemic showed clearly our effect on the environment. More companies are now looking to invest in a recovery that is as green as possible, as employees, consumers and regulators increasingly demand measures to combat climate change.
But we’ve also seen an increased focus on the social part of ESG, particularly as the pandemic has highlighted the importance of human health and wellbeing, and on the G because governance really feeds into resilience. Risk management, supply chain planning, resilient revenue and funding models, for example, are all part of good governance.
What does all this mean for corporate trust service providers?
HP: Sponsors and investors focused on ESG look to partner with those with the same engagement in sustainable finance. So, we regard ourselves as a bank as a strategic partner for our clients in the economy’s transition to sustainable development and climate targets.
Deutsche Bank has defined sustainability as one of its core strategic priorities, with a particular focus on sustainable finance. We have quantified a target of having more than €200 billion in sustainable finance by 2025, and devised a framework for those activities that is aligned with regulations. We issued our inaugural green bond in early 2020 and we’ve sought to empower every employee to work through what ESG means for clients.
That means our trust and agency service can support clients end-to-end in sustainable finance across a range of asset classes, including water, clean energy and clean tech.
TD: In the renewables space alone, our project finance agency service teams are supporting more than 20 GW of capacity globally.
For example, we worked in the past few months in roles ranging from account bank collateral agent, to facility agent, administrative agent and intercreditor agent on the financial closing of the construction financings for BayWa r.e. 250MW Amadeus wind farm in Texas and X-Elio 58MW solar voltaic plant in Chile as well as the green bond refinancing of CPP Investments’ minority interest in the Hohe See and Albatros 609MW offshore wind farms in Germany. Just these three projects are expected to keep close to 2.65 million metric tons of carbon dioxide from being released into the air each year and generate enough power to meet the demand of 800,000 local homes.
And, back to the point Henrike made about partnerships between organisations with the same attitude towards sustainability, for all these projects we worked in close collaboration with sponsors and developers with high ESG standards in the renewable energy space.
How do you see ESG focus developing in infrastructure investing over the medium to long term?
TD: There will be increasing amounts of capital flowing to green and sustainable infrastructure projects. Sponsors and companies with the most rigorous ESG focus will also find that they benefit from a lower cost of capital across both debt and equity, and that will accelerate the green energy transition. And finally, we’ll see further development of certain asset classes that still have significant growth to go for as economies transition to cleaner energy and transportation, such as electric vehicles, battery storage and microgrids.
HP: There will be strong demand for improved ways of measuring impact in infrastructure – firms will need to think about how they measure their contribution and that will be critical to achieving the SDGs. There is also a theoretical point around political discourse. For example, the G20 has been looking at whether securitisation could be used for green infrastructure projects and there is political support for this. This, and other potential moves, could create new asset classes and help investors build diversified portfolios around sustainable infrastructure investing.
What developments are you seeing in the green bond space?
HP: Green bonds have been an important part of the market and they remain so because climate change is the most important challenge our society faces. This year so far has seen a slight dip in issuance compared with 2019, but the figure is still more than $130 billion, so that’s impressive growth, especially when you take the covid-19 impact into account. We’ve also seen a greater diversification of green bond issuers – Daimler is a recent example, and that was more than four times oversubscribed and speaks to the recognition of a green premium in the market for issuers. The EU’s proposed Green Bond Standard is another welcome development and will further drive market growth through standardisation.
TD: We’re also seeing developments in adjacent markets. Green bonds have traditionally dominated, but we are seeing a diversification in sustainable and social bonds since the arrival of the pandemic. This has been helped by the launch of a new set of sustainability linked bond principles by the International Capital Market Association that has expanded the eligibility criteria to include areas such as vaccine development, food security and public spending to aid employment. As an example, earlier in the year, we worked with USAA Capital Corp. on its $800 million inaugural sustainability bond that will be focused on ESG investments, including affordable housing and covid-19 relief projects.