The road to net zero is paved with good intentions, but infrastructure investors increasingly need to identify when words might not turn into actions. Every stakeholder needs to ensure tangible progress is being made by every new infrastructure project and that existing infrastructure is retrofitted for the modern world.
The scale of the mission is conveyed by a UN Habitat report, which found that cities – which house a significant proportion of infrastructure – consume 78 percent of the world’s energy and produce more than 60 percent of greenhouse gas emissions. Infrastructure investors, therefore, have a responsibility to harness their capital to galvanise genuine and quantifiable change.
The indomitable rise of sustainable investing means virtually every company and fund manager now claims to be acting with climate change and other ESG factors in mind. Yet the complexity of measuring emissions and the lack of standardisation for reporting progress on carbon reduction often lead to greenwashing or impact washing, with claims overstated or never vigorously verified.
“[Carbon offsetting] is like mugging a person on the street and paying someone else to go to jail while you go on holiday”
Avoiding investments that engage in either of these can be tricky, especially as organisations may miss targets for genuine reasons rather than actively misleading investors. However, as stewards of capital, asset managers must be alive to these issues, whether they are intentional or not.
“Managers and investors need to develop robust self-criticism to avoid the myopia which can come with investing in the built environment,” Ed Dixon, head of ESG, real assets, at Aviva Investors says. “Not all assets are good, and even assets which are labelled as impact can have negative consequences for stakeholders.”
For example, Dixon highlights that a portfolio of primary schools might appear to be high impact, but if those schools are built poorly and have sub-standard energy performance, then “we’re robbing Peter to pay Paul”, creating some supposed positive impact over here, only then to negate those positives through poor delivery.
Mark Sait, chief executive and co-founder of SaveMoneyCutCarbon, believes organisations that rely purely on carbon offsetting are at risk of being seen as engaging in greenwashing, and so investors might want to avoid them.
“It’s admitting that they’re going to do environmental harm, but will plant trees to offset it,” he says. “It’s like mugging a person on the street and paying someone else to go to jail while you go on holiday. It doesn’t reduce emissions; it just eases guilt.”
Sait adds that offsetting schemes are now coming under increasing scrutiny, with their validity more frequently questioned, including whether trees were actually planted in a far-flung destination as promised, whether said trees lead to a monoculture or take into consideration wider sustainability factors, such as biodiversity, and whether the supposed offset is actually measured and quantified.
“We are seeing now that investment houses are taking this really seriously and are holding businesses to account, while consumers are also more savvy and want to know more about the environmental and social impact of infrastructure,” Sait adds.
“And with the finance sector on the other side, increasingly demanding to know the efficacy of the sustainable projects it funds, infrastructure finds itself in the middle.
“There’s essentially a greenwashing squeeze, with creditors and consumers putting pressure on firms from each direction, and those organisations that don’t understand that will get caught out.”
With sustainable investing in a hyper-growth phase, countless firms are rushing to be involved. This presents opportunities and challenges.
While there is an increasing number of organisations help firms to record and measure their emissions and implement more sustainable operating models, the vast spectrum of expertise and approaches makes it extremely difficult – and sometimes impossible – to compare ESG claims between different firms.
Jeffrey Altman, senior adviser at Swiss-based Finadvice, believes this panoply of approaches is a significant problem.
“Ubiquity is one of the key issues,” he says. “Everyone has different standards, which is a problem for portfolio managers, which need methods that other people comply with.”
Michael Grant, chief operating officer at real estate software firm Metrikus, agrees. “There is definitely a need for a globally accepted ESG framework. There are currently so many different guidelines and criteria that it can be really quite difficult to choose a standard to adhere to, let alone actually get started with improving performance. With proper standardisation, companies will be able to report in a consistent and collective way on the impact they make,” he says.
Frameworks such as the UN Sustainable Development Goals, and the Task Force on Climate-Related Financial Disclosures are beginning to offer an international set of rules that will allow managers and investors to better target, measure and report their decarbonisation efforts, thus helping to reduce the potential for greenwashing.
“That said, further harmonisation between frameworks and standards will be needed as investors rush into this space,” warns Aviva Investor’s Dixon. “Whether it is GIIN (the Global Impact Investing Network) or the UN SDGs, every framework is trying to do something a bit different in a different corner of the market.”
Until this sprawling conundrum is solved, though, investors need to ensure best practice is being adhered to as effectively as possible with the tools currently at their disposal.
Controlling your approach
This is a case of not letting the perfect be the enemy of the good.
Vincent Gerritsen, head of UK and Europe at infrastructure and property investor HRL Morrison & Co, believes investors can avoid greenwashing through “the adoption of independent assurances over disclosures and metrics to ensure they are complete, demonstrable and fully explainable”.
“We work closely with the GRESB Infrastructure Assessment because it provides a valuable ESG framework for measuring the impact of infrastructure assets,” he says. “GRESB also provides training to asset managers and investors on how to measure and report effectively and its Infrastructure Standards Committee is looking to set out standardised metrics for the sector.
“Having a standard definition for impact across the infrastructure sector, similar to the approach taken by the real estate industry, will help ensure standards are feasible and can be practically implemented.
“From an investment point-of-view, there is increased recognition that improving ESG goes hand-in-hand with creating optimised and sustainable long-term investment outcomes,” Gerritsen adds.
“This holds both from the investment manager’s perspective as well as from the perspective of the investors backing the managers that are emphasising a focus on ESG and driving improvements.”
Striving for change
Credibility is at the heart of every infrastructure investment’s decarbonisation efforts and it is likely that technology will play a role in solidifying this.
“We need the full alignment of all stakeholders, making sure the information that is provided on ESG or impact is fully seamless throughout the entire stakeholder supply chain, from investee company right through to the regulator,” says Finadvice’s Altman.
“The only way to do that is through a digital platform, such as blockchain, so there can be a standardised methodology and also rewards for success and penalties for failure or misrepresentation.”
Others agree that while there has been progress towards better measurement and reporting in the industry, further developments are required.
Joss Blamire, GRESB’s director of infrastructure, notes the challenge of quantifying impact and climate-related performance is “one of the most relevant conversations regarding ESG and impact investing today”.
“Taking an issue as critical as net zero, the infrastructure sector broadly knows the challenge of achieving zero emissions by 2050,” he says. “However, detailed sectoral pathways to measure progress towards that aim are not yet in place, which makes judging impact in the shorter term more challenging.”
While the global investment community works on bridging the gap between where it is now and where it wants to be, it is likely that greenwashing and impact washing will remain to some extent.
Aviva Investors’ Dixon says that while impact has historically been the preserve of boutique managers, now mainstream capital is seeking to deliver impact through its existing investments, as well as creating new impact allocations.
“But with the goldrush into this space, we can expect tick boxing aplenty as managers seek to capitalise on the trend but don’t have the credentials to deliver,” he adds. “The use of external frameworks is essential, high-quality reporting is mandatory and external validity in the form of assurance or second-party opinions should always be sought to ensure managers are really delivering what they say they are.”
Many organisations have realised that embracing sustainability creates long-term value and makes business models more viable in the future. As a major emitter with a huge potential for change, the infrastructure sector is likely to be forensically scrutinised for its progress on decarbonisation.
The sector has the ability to help expand clean energy generation, create greener transport networks and develop more environmentally friendly production methods, but these are just a few of the large hurdles the sector needs to overcome to play its part in a decarbonised future.
SaveMoneyCutCarbon’s Sait says another hurdle is energy distribution, which will be key as the reliance on electricity ramps up.
“Infrastructure in generation capacity is important, but distribution is even more so,” highlights Sait. “People often think of large-scale projects when they think of infrastructure, but the really big issue will be in your home, your business, your village or your factory when the lights start going out.
“We are used to flicking a switch and it is there, but we are underestimating the infrastructure challenges at the micro level and that is an area the infrastructure sector could be pivotal in tackling.”
Whether it is on a small scale – such as Metrikus’s work with Manchester Metropolitan University to significantly reduce the emissions produced by its new business school – or large, such as helping to reshape the planet’s energy mix, infrastructure investors and stakeholders of all sizes must ensure every decision they take is made through an ESG or sustainability lens.
“If investors aren’t actually changing the nature of the underlying investment through the application of their impact framework, then no real impact is being achieved,” says Dixon.
“Our infrastructure tomorrow will look very different to how it does today and managers need to push through that change through every investment.”