Seeking enlightenment

For a while now, the letters ‘E’, ‘S’ and ‘G’ have been imprinted on the minds of private equity investors as champions of environmental, social and governance responsibilities have made their voices heard.

But, as panellists at an infrastructure workshop at PEI’s recent Responsible Investment Forum in New York heard, environmental, social and governance (ESG) practices can be particularly important in the infrastructure world. Not least, this is because infrastructure fund managers have to balance public and private sector interests and look to hold assets for long periods, possibly decades.

“The long-term aspect of infrastructure changes it entirely,” said Jordan Berger, director of policy compliance at Canadian pension fund manager OPTrust.

As a public employees’ pension fund, he added, labour and governance issues are particularly important to OPTrust. And as a direct investor, it has to take a hands-on approach. “When you’re investing directly you really have to integrate with the deal team,” Berger said.

Long-term risks

Azhar Abidi, director of sustainability and responsible investment at Australian fund manager Industry Funds Management, emphasised that infrastructure assets are not tradeable and often highly illiquid, so investors must consider risks such as pollution and labour practices over the long-term, rather than evaluating investments purely on financial liabilities.

“ESG is part of our fundamental risk assessment of assets,” he said.

These issues may become more important when investing abroad. Hew Crooks, partner at Great Circle Capital, a Connecticut-based firm focused on transportation and logistics investments in emerging markets, said that many infrastructure ESG assessments are “comparable” to those made by private equity funds, but that ESG practices are particularly important for infrastructure assets in foreign countries, as there often isn’t “unanimity” around foreign or private ownership of those assets.

He said that any mistakes may be scrutinised heavily and that the potentially lethal effects of infrastructure-related accidents may mean “you are not going to be welcome in that country”.~

But the details of how to measure ESG risks over 20- or 30-year periods can be far more complex than simply paying lip service to labour unions or environmental guidelines.

Michael Underhill, chief investment officer of US-based real assets manager Capital Innovations, said fund managers must take into account many variables, which can be challenging as investors receive different levels of information depending on the size of their commitments.

“The level of transparency and disclosure that you get if you are a $5 million or a $500 million investor are drastically different,” Underhill said.

Abidi said it was important for direct investors to have board rights and to consider issues such as safety and labour practices to avoid problems down the line. But he suggested that active pursuit of ESG as a separate part of an infrastructure fund’s investment strategy may be missing the point.

“In Buddhism, there is a thing called enlightenment or Nirvana,” Abidi said. He suggested that ESG was like achieving enlightenment, as it is part of an integrated state of being that one is constantly working toward. If you can maximize that state, Abidi said, then you are in “ESG-land”.

When asked if ESG issues had changed substantially over the past 15 years, panellists said some new guidelines around ESG practices had been put into place, but the need for and the nature of ESG assessments had not changed materially.

“The fact this is not very revolutionary indicates we are perhaps getting closer to Nirvana,” Berger joked.