Raj Agrawal
Global head of infrastructure, KKR

Dan Grandage
Head of ESG, private markets, Aberdeen

Felix Heon
Sustainability director, Antin Infrastructure Partners

Dan Watson
Head of ESG, Amber Infrastructure Group

The world is racing to meet net-zero targets by 2050. Can infrastructure deliver?

Dan Grandage: Current forecasts are for $3.7 trillion required cumulative infrastructure spend per annum until 2040 to meet global demand. The pressure on public finances as a result of the measures that governments were required to take in response to the impacts of covid-19 will continue to constrain state budgets for many years to come and will mean that the private sector will need to play a larger role if this target is to be realised.

Felix Heon: Infrastructure can deliver, but certainly not alone. Achieving net-zero emissions requires collective action. Infrastructure companies can take a variety of steps to decarbonise their operations, but only with the active involvement of all stakeholders. For instance, regulators need to enforce policies to incentivise all actors to move towards net-zero; private and public organisations need to accelerate R&D to mature and scale low-carbon technologies; and investors and banks need to provide financing to phase out carbon-intensive assets and build greener ones.

Raj Agrawal: Infrastructure investing will be one of the key facilitators of the global transition to net-zero. Analysts project that over $100 trillion of investment between now and 2050 will be required to achieve this global objective. We believe much of this will be in sectors where we are actively investing, such as renewable power generation, and in the scale up of newly proven technologies, such as battery storage and carbon capture, where we are spending a lot of time. In this way, growth in infrastructure investing is critical to the drive to net-zero.

Dan Watson: For the world to meet its net-zero targets by 2050, infrastructure has to deliver. The big challenge that infrastructure faces is what net-zero looks like for project delivery. While tools and frameworks, like the EU taxonomy, are hugely helpful, there is very little agreement on what targets should be set for the net-zero delivery of infrastructure. Until the supporting industries, such as steel and cement production, are decarbonised, there needs to be a recognised approach to delivering infrastructure in line with net-zero pathways.

Net-zero aside, what other big ESG-related challenges are asset owners facing? 

DG: The transition to a low-carbon economy is definitely the most challenging ESG risk, and the one receiving the most airtime. However, understanding and managing labour and human rights issues associated with infrastructure assets has been a key tenet of our approach for some time. We need to not only consider the health and safety of employees and our supply chain, but we must also protect the local community, particularly where minority or indigenous peoples are impacted.

FH: To me, figuring out how to better share wealth among portfolio company employees and their communities at large is one of the biggest ESG-related challenges private equity will face. The industry has grown exponentially over the last decade, and so has its economic and societal importance. As such, firms today face both heightened scrutiny and an increased expectation that they actively tackle inequality, an issue which has been highlighted by the disproportionate impact of covid-19 on low-income populations.

DW: The variety in reporting frameworks and standards has created a challenge for reporting and communication more broadly. We want to select suitable benchmarks that help to drive meaningful change, but also resonate with investors. To date, this has not been easy to achieve. We’re hopeful that the emergence of the EU Sustainable Finance Directive Regulation, taxonomy, and emerging UK Sustainability Disclosure Requirements will act as an anchor for asset owners to frame their ESG reporting strategies.

What is the most common question you get from LPs?

DG: The most common ESG-related question at present is in relation to what types of assets we would not invest in, typically from a fossil fuels perspective, but sometimes from a wider ethical perspective too. We find that many LPs are going through change and coming under pressure from their boards and shareholders to clearly articulate their approach to ESG, and this is resulting in an increased number and sophistication of ESG-related queries.

FH: In the past few years, our LPs have become increasingly focused on climate change, an ESG issue highly material to most infrastructure companies. We receive frequent investor questionnaires covering the actions we take to both reduce portfolio companies’ carbon footprints and to identify, assess and address the climate change-related risks they’re exposed to. More recently, we’ve also been receiving questions related to how we promote diversity and inclusion at both the firm and portfolio-company level, especially from our US-based LPs.

DW: Increasingly, we’re getting more sophisticated questions around climate change risk and scenario analysis. This is, of course, down to the recommendations of the TCFD and a good demonstration of how having a clear framework for reporting will enable LPs to ask more robust questions on material ESG issues. Moving forward, we expect there to be greater focus around SFDR and taxonomy alignment – particularly around how we’re working to reduce adverse impacts and evidence sustainability through recognised third-party benchmarks.

What are the most important ESG KPIs/metrics?

DG: The key metrics we focus on across assets are typically in line with the principal adverse sustainability impact indicators as defined under the SFDR, although we also use the Sustainability Accounting Standards Board as a useful high-level pre-investment screen. Assets have different environmental and social impacts depending on the nature of the asset, the location and the surrounding area. Once the most material impacts have been identified, appropriate targets can be put in place.

FH: KPIs that are business-specific, reliable, comparable and tied to a company’s success. One-size-fits-all KPIs are rare, as every company’s ESG impact profile is unique. It may make sense to report one company’s carbon intensity in CO2 emissions/unit of revenue, while it may prove irrelevant for another company whose emissions are not correlated to sales. It’s also important to source KPIs from trustworthy data, measure them consistently to compare them over time, and link them to companies’ operational or financial performance.

RA: We recognise that no two businesses are the same and therefore take a company-specific approach to our management of ESG issues, including with the identification of their KPIs. While there’s no one-size-fits all approach, one commonality across companies is our measurement of baselines and reporting on progress in improving those measurements over time. In addition, we approach this effort with humility, recognising that really smart leaders have spent years thinking and working on these questions. To that end, we use SASB’s industry-specific standards as a primary input when identifying the ESG issues that we track. We believe we can achieve stronger business outcomes when we get this right.

DW: The emergence of TCFD will accelerate the development of KPIs/metrics that link climate risk to financial performance. While greenhouse gases will be a helpful indicator to some, it doesn’t necessarily communicate the risks of the underlying investment. Metrics like ‘expected insured losses’ or ‘climate-adjusted investment rate of return’ are likely to emerge as LPs seek to understand the material climate risks to their investments.

What does the future hold for sustainability in infrastructure?

DG: In order to ensure that environmental and social impacts are the most advantageous, sustainability factors need to be appropriately embedded into the procurement process for new assets. The public sector is rightly encouraged to seek value for money in procurement. However, this is often interpreted in terms of least cost rather than optimum quality and ‘whole life’ value. Additionally, a key point that must be addressed to drive forward ESG progress in the sector is the standardisation of ESG measurement and benchmarking.

FH: The global focus on sustainability will completely transform the infrastructure landscape over the next decades, giving rise to greener, smarter, better connected and more socially inclusive infrastructure, that will be essential to addressing the world’s most important ESG challenges, such as climate change and inequality.

RA: I am very excited by the potential growth in and impact of infrastructure investing with respect to sustainability. We see tremendous opportunity to invest well while doing good. In addition to obvious areas like renewable power generation, we also seek to transform sectors like data centres from massive power consumers to sustainable assets with green generation and storage.

DW: I’m hugely optimistic for the future of sustainability in infrastructure. By having a renewed focus on delivering infra sustainably, there will be multiple indirect benefits for society alongside financial returns for investors. Sustainability will increasingly be seen as a quality indicator, which will have direct relevance for the long-term financial performance of investments.