Chris Leslie

This article is sponsored by Macquarie Infrastructure and Real Assets

How have attitudes towards ESG evolved?

There has been a heightened focus on ESG, universally. Infrastructure is not unusual in that regard. In fact, infrastructure may be a little behind the curve when compared to private equity, for example.

Nonetheless, we are seeing a clear increase in the attention paid to ESG factors within the infrastructure community, as well as a shift from ESG being viewed purely through a risk lens, to ESG being seen as an opportunity.

What has driven that shift and how does it support value creation?

Risk mitigation continues to be a very important part of ESG. The risks have not magically gone away. In fact, they are probably heightened.

To account for that, we have a centralised risk function that operates independently from – but works with – our investment teams. That team assesses whether each transaction meets our strict ESG hurdles.

Risk aside, as society grapples with some of these global challenges, we still have a fiduciary duty to our clients with regards to delivering returns. I think there is a growing recognition that we can make investments that do both – that are positive for people and the planet, and that also generate financial returns.

How much variation do you see between geographies on ESG?

EMEA and Australia are probably still the most advanced when it comes to ESG, but I do not think there is a pocket of the globe that is ignoring these issues. There are, however, different emphases depending on where you are in the world.

Europe and Australia tend to be more climate-orientated. Meanwhile, there is a social overlay to a lot of things going on in America at the moment. And governance issues may be more prominent in Asia than in more mature markets. That said, we see Asian investors that have very strict requirements, so it is hard to generalise.

Is there increased focus on ESG, and perhaps a shift in focus from the environment to more social factors?

It is interesting to look at this global pandemic and map that onto other global challenges that we face. In a perverse way, covid-19 gives us insight into the sort of global co-operation that is going to be necessary to deal with things like climate change.

If you rewind to January this year, when the Australian bush fires were in the news on a daily basis, it was clear that climate change was being elevated in people’s consciousness around the world. At that moment, we got a glimpse of the underlying changes that are going on in terms of attitudes to sustainability. But then covid-19 hit, and sustainability seemed to disappear from the agenda for some time.

Now we are at a point where, obviously we have not emerged out of the pandemic, but it is being managed and people are beginning to focus on broader sustainability issues again. But they are doing so through a covid-19 lens, which just adds to the intensity.

The world is changing at a remarkable rate. How do you allow for that speed of change when considering the sustainability of your investments?

That is a very important point, particularly when thinking about exits. In a world that is changing as rapidly as it is, there is a great deal of uncertainty around the 10-year outcome. Is this an industry that is falling out of favour? Are assets resilient to climate change – be that heat, storm, or rising sea levels?

A lot of what is going on in the natural environment has focused attention on 10-year out analysis – who we might be selling to and what the world might look like then. Of course, we have always been concerned with exit scenarios, but ESG factors are now a far bigger part of those conversations than they were before.

It is also a key consideration in our investment strategy. We are no longer making investments into assets that have a coal exposure; and hydrocarbons, in general, are receiving a lot more scrutiny from investment
committees.

If you take something like natural gas, there are risks in that it is a hydrocarbon, but also rewards with regard to conversion into hydrogen, and the role gas may play both as a transition fuel and in providing new cleaner solutions in the future. Those are some of the interesting questions we are playing through.

What are you doing to improve the sustainability of your existing assets?

That is something we are focused on, right across the board – over 150 assets, approximately $140 billion in assets under management and more than 150,000 employees and contractors at those portfolio companies. The good news is that most employees are generally highly supportive of these types of initiative. They see it as a challenge, both in the environmental and social sense, but also the financial sense, in that they recognise that the investment will face challenges if these issues are not addressed.

One of the challenges, however, is the sheer range of things we are looking at – from safety related matters, to climate, resilience, and social factors. We are also very focused on diversity and inclusion. We are also trying to bring a lot more non-financial reporting and transparency into the equation in general. It’s a big investment of time and resource – but something that we see as essential for the long-term success of these companies.

Do renewable assets automatically get an ESG pass?

Renewables tick the decarbonisation box, just by their nature. But at the end of the day they are businesses, just like anything else. They are run by human beings that need to be given a clear strategy, accountability and governance. And then, offshore wind farms, for example, are often serviced by vessels that burn diesel so there are carbon emissions associated with their construction and maintenance, which means they don’t escape environmental scrutiny just because they are producing green power.

How should ESG be resourced? Is it for individuals to take leadership or is it a responsibility to be equally shared?

It is both, really. For us, ESG, in the risk sense, is first and foremost the responsibility of our deal and asset management teams. Our risk and sustainability teams provide guidance, advice and challenge. There is real discipline there and it is fully embedded within our investment process.

What we have done, more recently, on the opportunity side, however, is to create a dedicated sustainability team. That is a resource to educate our investment teams so that they can personally own the outcomes of these sustainability opportunities.

In turn, that experience can be pushed down into the management teams of companies, who are ultimately responsible for realising the opportunities. So, what would success look like for us? That sustainability best practice has been fully integrated into everything we do. But it is a journey and we are not there yet.

What new pockets of investment opportunity do you think the drive towards sustainability will bring?

We have a lot of challenges ahead of us and the human race is an innovative bunch when it comes to problem solving, so I am sure there will be lots of new opportunities that pop up.

However, infrastructure is, by design, a lower risk asset class and so while there is a lot of excitement around technologies like hydrogen and batteries at the moment, the interesting question is at what point do these investments go from venture capital risk profiles to infrastructure risk profiles.

I think the real opportunity for infrastructure investors like us is to look at deploying these technologies within assets we already own.

For example, Cadent, which operates the largest gas pipeline network in the UK, is trialling hydrogen technology: in part of their network they are supplying a blend of natural gas and hydrogen, which significantly reduces emissions.

They are also leading the pipeline transportation workstream for a nationwide project which includes development of the entire hydrogen supply chain in the UK. It is about using the scale we can bring to the table as a test bed for some of these new solutions.

What does the future hold when it comes to ESG in infrastructure, more broadly?

We believe that infrastructure is critical to a lot of the challenges the world is facing. The assets in which we invest impact people on a daily basis – be that water, power or transport. That means we have an essential role to play in sustainability.

We see recognition of that in the way that investors are operating, and in what it is our people want to do. It brings a sense of purpose to our daily activities that is really exciting. And we are only at the beginning of the journey.