This article is sponsored by Infracapital
How are sustainability regulations currently influencing the ESG conversation?
The more stringent approach to disclosure and transparency that we are seeing is, for the most part, driving forward the ESG agenda. The EU’s Sustainable Finance Disclosure Regulation, for example, provides investors greater disclosure around managers’ ESG commitments and ensures greater accountability. It is a step in a positive direction, mobilising capital towards green and sustainable practices, and towards greater disclosure, transparency and accountability in this space, albeit not without its limitations.
The regulatory landscape is also increasingly complex – upon entry to investments during their lifecycle and upon exit – covering topics such as due diligence, financing, human rights and supply chains to name a few.
If we take sustainability-linked financings, for example, we need to balance the promotion of such products with potentially added verification and reporting costs, and potential reputational risks associated with setting appropriate and challenging KPIs given the lack of standardisation in the market.
We are expecting that regulation and industry bodies will inform greater standardisation on what good looks like as our global understanding of ESG continues to evolve.
What will greater benchmarking and standardisation of data mean for ESG reporting?
One of the greatest challenges in this space is the availability of ESG-related data. Clearly, it is fundamental for informing decisions on investors’ capital allocation and, ultimately, how we create businesses committed to sustainability.
There are a variety of organisations that are addressing the need for an ESG benchmark in the private space, GRESB being one of them. This year, we submitted our brownfield strategies to GRESB. Whilst the tool is still evolving, it has driven greater discipline in the collection, and quality, of data. Not to miss the benefits, from an LP perspective, of comparing ESG performance on a like-for-like basis.
Whilst different managers approach ESG in different ways, we, as an industry, need to work toward a standardised set of material KPIs for the sectors in which we invest to illustrate performance and impact. Standardisation in this space will facilitate a lot of what the ESG-related regulation is trying to achieve: greater accountability to an established minimum standard.
How are infrastructure managers thinking about carbon emissions reporting when setting net-zero goals?
Greenhouse gas emissions reporting is not without its challenges. We have implemented Scopes 1-2 GHG reporting across our portfolio to inform net-zero roadmaps we are developing with our businesses. We disclose such data to our investors on an annual basis, aligning with our parent company’s commitment to reach net zero across assets under management by 2050 and facilitating our LPs to inform their own net-zero targets.
“Climate change adaptation is… arguably as important as climate change mitigation, and just as time sensitive”
As an infrastructure investor, Scope 3 emissions will be a material driver for the majority of our businesses. When looking at Scope 3, you have to take a materiality-driven approach to reporting and assessment. Some are low-hanging fruit; others, such as if we look at the emissions from the supply chain or the embodied carbon of a business, become more challenging given the dependency on other industries, and are exacerbated if you do not have significant purchasing power. You are also likely to have suppliers/contractors that are SMEs who, at this stage, may not be able – because of a lack of resources, knowledge constraints or otherwise – to collect that data. We must work with all market participants in driving the race to net zero.
We’ve started Scope 3 reporting at c.80 percent of our portfolio companies. Whilst at the initial stages of reporting, Scope 3 reporting, and subsequent engagement with relevant supply chains, needs to advance to reach global net-zero targets.
How important is collaboration with international bodies to ESG progress?
We have to take a step back and look at the bigger picture – why we are doing all this significant work on ESG. Ultimately, it is to build a sustainable and inclusive future for all. Climate change mitigation and adaptation, the need to reduce inequalities through provision of essential services, bridging the digital divide globally and the circular economy are all big macro trends that will determine the future we live in.
No single player is going to be able to move that dial alone. It has to be an industry collective to unlock innovation and that requires collaboration across global economies to drive the agenda forward.
Infracapital recently joined the iCI, a private equity action group on climate change supported by the PRI, due to the value in collaborating with our peers to develop a framework to get a stronger understanding of climate risk and, in particular, scenario analysis. Many players are facing similar challenges and international collaboration will allow us to drive the agenda forward and, ultimately, mobilise more capital into sustainable and resilient solutions to 21st century challenges.
How should diversity, equity and inclusion factor into decision making and board structures?
Rightfully, the spotlight has been shone on diversity, equity and inclusion. Numerous studies show the business benefits of a more diverse and inclusive workforce for innovation, resilience and productivity, regardless of the obvious moral argument.
In the war for talent that we find ourselves in across our industry, and the industries in which we invest, to grow and scale businesses, the attraction and retention of diverse and inclusive talent is of fundamental importance. We need to challenge established recruitment practices and ways of working to really progress in this space.
We have a DEI group, where representatives across our portfolio companies focus on initiatives, best practice and lessons learnt on this topic. Additionally, as a founding member of the Infrastructure Industry Foundation, we are working on the creation of a social mobility programme for the industry. In a sector where this issue is pronounced, and to my earlier point on the importance of industry collaboration, the IIF provides a platform for the industry to come together to build something that will hopefully have a lasting global impact.
The S in ESG is obviously a fundamental element. How should firms look to weigh social considerations into their strategies?
There has been a significant surge on the S side, especially on the theme of human rights. We’ve seen the pandemic highlight the precarious conditions of contractors, for example, and the need for robust protocols to address human rights considerations across supply chains.
The nature of our work means that factors such as health and safety, labour conditions and human rights can be pertinent. Companies are increasingly exposed to financial and reputational risk – we have seen recent controversy around solar imports from the Shenzhen region in China and human rights allegations related to the supply of raw materials critical to the energy transition.
Undertaking a thorough risk assessment of supply chains and impacts on human rights, both in procurement and ongoing monitoring – especially when operating in opaque supply chains – is of fundamental importance. The PRI, for example, has useful tools which help shed light on systemic issues that assets can be exposed to.
To what extent should we be transitioning existing businesses, rather than just building more sustainable ones from scratch?
As we race to net zero, there are many parts of the economy that we cannot replace with fully renewable alternatives overnight. Climate change adaptation is therefore arguably as important as climate change mitigation, and just as time sensitive. A recent McKinsey report illustrated this – with 54 percent of GHG emissions in the EU coming from transport and industry, compared with 23 percent in the power sector.
It is vital that managers such as ourselves, who are committed to sustainability, actively invest in transitioning existing business – to improve their efficiency and adapt service provisions in line with a net-zero future, whilst still providing the essential service that society requires. That is where there is a real value-add proposition.
An example is our UK multi-utility business, Last Mile, and its partnership with heat pump specialist, Rendesco. The partnership strives to provide a more sustainable and cleaner option for heating properties in the UK. We have also seen it in other sectors, such as retrofitting existing assets to allow for the blending of hydrogen into our gas networks. There has to be real emphasis on the transition if we are to address the climate crisis: working with existing businesses to adapt to be resilient in a changing world.
COP15, the UN Biodiversity Conference, will take place in Montreal before the end of the year. What is biodiversity’s role in the ESG playbook?
There has been significant fear that momentum in addressing this important area has slowed given the delays in getting COP15 in place. Halting biodiversity loss is an important component in achieving net zero, and one that is sometimes overlooked. We need transformative change and innovation in how we nurture nature, and we need to account for the value of nature in the decision-making process.
We have seen this play out in the hydro space. There is an increased focus on reservoir-based hydropower development, which contributes to a number of the UN SDGs such as accelerating affordable clean energy and climate action, but at the same time can negatively affect other SDGs on land and water use. For new infrastructure projects, it is about reworking infrastructure construction design to allow for biodiversity recovery.
Natural assets have the potential to become a significant part of the infrastructure universe in addition to us, as managers, being more mindful to the biodiversity impacts of our existing investments. We need to work towards quantifying the financial value of natural capital, which is difficult and still in the early stages, although we have seen progress via the TNFD.