ESG movement ‘accelerated by covid’

Covid-19 and more awareness of the climate crisis have led to change, writes UBS Asset Management’s head of infrastructure research and strategy, Declan O'Brien.

Declan O’Brien

The headlines make for formidable reading. In Q2, Morningstar registered record capital flows into sustainable funds, with more than $54 billion raised. And in September Forbes reported that stocks aligned with environmental, social and governance factors were up 78 percent for the year to date. This followed broader market sentiment. In 2019, UBS Asset Management surveyed more than 600 institutional investors, and a majority said they believed environmental factors would matter more to their investments than traditional financial criteria over the coming five years.

Although private infrastructure was initially slow to integrate ESG best practice, the past five years have seen a rapid transformation. Upcoming EU regulation and ESG-related disclosure will accelerate this change.

Within infrastructure, clean energy is the poster child for ESG-focused investors. However, other sub-sectors can create positive ESG benefits, whether it is connecting rural areas with fibre-optic cables or providing healthcare services, schools and housing. Clean energy accounted for almost 50 percent of deal volumes between 2012 and 2019. The decarbonisation of electricity over the past 10 years has been remarkable, largely thanks to the growth in renewables. The next wave of investment, such as in hydrogen, will help reduce carbon in hard-to-abate sectors such as heat, transport and industrial processes, thus lowering emissions significantly.

Clean transport key to net zero

Although the social and economic benefits of investment in transport are clear, the emissions from the sector are sizable. If net zero targets are to be met, transport needs to be decarbonised. Momentum is growing in the electric vehicle market, which will require new charging infrastructure and reinforced grid networks. This in turn will provide a boon for infrastructure investment.

The transition to a world fuelled by zero-carbon energy has begun, with many industries taking intermediary steps to reduce carbon emissions before more sustainable sources are widely and economically available. Gas-fired generation will be critical to replace coal and support the growth of intermittent renewables until storage is competitive. Diesel-powered ships will be replaced with liquefied natural gas-powered vessels. This will reduce carbon by around 25 percent in the short-to-medium term until hydrogen becomes competitive.

The momentum on ESG in the traditional markets is encouraging and we expect to see a continuation of this trend in private markets. Our latest equity offering uses an external consultant to measure the carbon footprint of each investment and to set ESG KPIs with a commitment to improving these over the holding period.

Infrastructure provides a unique opportunity to access direct investments in sectors with attractive ESG fundamentals. The asset class has been resilient to covid-19 to date, and the pandemic has only accelerated the attractiveness of clean energy, good broadband connections and access to quality healthcare.