Perspectives: ESG best practice is maturing

Most LPs across private markets now include ESG considerations in their due diligence but a lack of progress on diversity and inclusion remains a concern.

Environmental, social and governance issues have always been integral to the infrastructure industry, but new regulations – the EU’s Taxonomy Regulation, the Sustainable Finance Disclosure Regulation and Non-Financial Reporting Directive – will come into force in 2021, representing an important shift for the asset class. “These regulations require a step change from the industry in terms of ESG transparency,” says GRESB’s director of infrastructure Rick Walters.

The majority of LPs across private markets now include ESG considerations in their due diligence, while almost 40 percent believe ESG to be a major component of their analysis.

These figures are likely to be higher still when considering infrastructure in isolation. “Infrastructure, as an asset class, is typically intensely focused on ESG, given that much of what gets built and operated is integral to the society it serves,” says Threadmark co-founder Bruce Chapman.

Nonetheless, infrastructure is not immune to the practice of greenwashing, a key issue given that almost a quarter of LPs in private markets do not believe their GPs take climate change seriously.

Greenwashing still a problem

“The sector has seen considerable greenwashing, and it’s helpful that organisations such as PRI apply stricter criteria to differentiate between managers,” says InfraRed Capital Partners’ head of investor relations, Sandra Lowe. “Infrastructure investments are long-term by nature and therefore well suited to ESG or sustainability mindsets.”

There is room for improvement when it comes to diversity. “Given the nature of its asset base, infrastructure may be further along the ESG curve in topics like health and safety, environmental impact management or community engagement,” says Partners Group’s head of business development private infrastructure, Vittorio Lacagnina. “But it may not necessarily be ahead of the curve on matters of diversity and inclusion when compared to the rest of private markets.” However, this does appear to be changing.

“Infrastructure GPs are generally very well run,” says Chapman. “It’s rare to find organisations behaving in a way that would be deemed unacceptable in the 21st-century world. And yet a woeful lack of representation from women and minorities remains. Of course, you can’t expect these things to happen overnight, but I do expect to see material change in the coming years.

“Diversity, in all its forms, is a very strong theme with investors and we do occasionally see mandates from pension funds with either a strong bias, or even an absolute requirement, for significant female representation.”

Indeed, 13 percent of investors say they have refused a commitment based on diversity issues. Chicago Teachers’ Pension Funds’ decision to, at one point, pass on Blackstone Group and Brookfield Asset Management (though it invested in Brookfield later on) is understood to have been predicated on a lack of workplace diversity. Given the spotlight on gender and racial equality in recent months, it seems probable that diversity and inclusion will follow in ESG’s footsteps. What was once a talking point could become a fundraising dealbreaker.

“The ESG world is maturing fast, with no excuses for poor performance,” says Aviva Investors’ managing director Darryl Murphy. “Investors want to see full transparency from asset managers about how these considerations are brought into their decision-making process. Investors also expect to achieve their ESG objectives with no impact on financial returns.

“Diversity and inclusion is also becoming increasingly important. The Black Lives Matter campaign has had a significant impact on the asset management industry and we’re increasingly seeing investors wanting to see diversity and inclusion in practice – moving beyond merely policy statements into real change.”