JPMorgan: ‘ESG has become the dominant trend’ in infra

Anton Pil, managing partner, JPMorgan Global Alternatives, argues ESG is an integral part of the value proposition and ‘fundamental to the bottom line’.

Demand for ESG, or sustainable investing, has exploded across the asset management industry, but private infrastructure businesses have been at the forefront of ESG investing for years.

Knitted into the fabric of local communities, these businesses often provide vital amenities – clean water, safe and efficient transportation and other systems or services that underpin economic development. As these are long-life asset classes important to people’s lives, long-term sustainability policies aligned to the public interest are therefore paramount. Asset managers deeply involved in this space tend to demonstrate a history of leadership and intentional engagement on ESG integration when it comes to risk mitigation and value creation.

While it has always played an important role, we have reached a tipping point, where ESG has become the dominant trend shaping the private infrastructure investment landscape.

ESG has gone from being a significant influence on the investment outcome for an infrastructure asset to being one of the primary determinants of long-term performance, along with fundamental financials. It isn’t an aspect for infrastructure investors to manage and execute, it is the value proposition – fundamental to the bottom line.

“Social factors are complex and deeply influenced by local context. Any failure can cost a company its social license to operate” Pil

This becomes evident when we step through the inputs to the E, S and G factors.

Governance is a prerequisite for any active strategy and it is threefold in private infrastructure: majority control, which allows for implementing sustainable practices; an independent board of directors, which brings diversity of insight, relationships and experience; and business-wide policies—hiring, anti-corruption, among others. It also includes reporting on ESG at a board level, to ensure it’s reflected in strategic priorities.

Next, environmental considerations, such as mitigating climate change risks and bolstering resilience, have risen to the forefront. Infrastructure investing has led other asset classes here, partly because meeting environmental regulations is a fundamental threshold for achieving expected returns. Examples include carbon emission reductions; water companies meeting water conservation goals; renewable energy providers reporting on emissions avoided; and the adoption, testing and revision of disaster resilience plans.

Third and most challenging to measure, but having significant impact on long-term performance, are social factors—an asset’s impact on its community, customers, employees and other stakeholders. Here, health and safety reviews are critical. Social factors are complex and deeply influenced by local context. Any failure can cost a company its social license to operate.

What does engagement to meet social standards look like? Giving utility customers access to real-time usage data, improving passengers’ airport experience and communicating with those affected by weather-related events are examples. Getting it right can both reduce risk and potentially be powerful catalysts for returns. Social factors also include positive customer satisfaction, community health and safety, local employment opportunities, diversity and inclusion and employee voluntarism.

The regulatory impact for infrastructure companies failing to adequately consider social factors can be enormous, with the potential for negative implications for community development; employee health and safety reviews; and reviews of customers, communities and supply chains.

Across all three factors, there are a key handful of sustainability initiatives that we believe are key drivers of investment returns for successful private infrastructure managers: culture, supply-chain management; resilience and disaster preparedness; and stakeholder and community engagement.

Stakeholder engagement
Taking one as an example, stakeholder engagement is at the centre of how an infrastructure business engages with those groups that it affects and who affect it. Keeping charges for essential services in check, providing responsive and proactive communication, investing in job creation for local economies, getting involved with local lawmakers to help set sustainable policies.

Further, with the uptick in incidents of extreme weather in recent years – droughts, wildfires, hurricanes, catastrophic tsunamis, etc – a greater premium has been placed on business resilience and disaster preparedness. Can the given system withstand external demands without material interruption? Do they have the capacity to mobilise needed resources and services in emergencies and implement a resilience roadmap/communications system for stakeholders? Having these plans in place determines how quickly and how well disruptions can be overcome.

ESG is a forward-thinking strategy that dictates success, not an afterthought to be completed when regulation demands it. As sustainable investing takes on increasing prominence for an industry that seems to still be defining what it really means, going back to the basics that private infrastructure investors have demonstrated – stakeholder engagement, know your community, connect with your customers, earn and foster trust, enforce controls and resilience preparation, plan policy for the long-term – is a good place to start and build common ground.