GRESB is the leading global environmental, social and governance benchmark for real assets. Working in collaboration with the industry, the organisation defines the standard for sustainability performance in real assets, providing standardised and validated ESG data to 75 institutional investors, representing more than $18 trillion in institutional capital. The results from the 2018 GRESB Infrastructure Assessment highlight three key trends for investors:
- More transparency about ESG performance;
- More greenhouse gas-reduction targets and reporting; and
- More focus on resilience.
These trends support several conclusions: ESG information about infrastructure investments is increasingly available and relevant to global challenges and financial performance. The new data show significant differences between infrastructure companies, including variation in sustainability targets, management processes, and performance reporting.
The rise of ESG as an issue for institutional investors is fundamentally about transparency. The absence of ESG information contributes to mispricing of risk and value. Leading institutional investors are increasingly using ESG information to establish and refine expectations for risk-adjusted returns, while identifying opportunities to reduce social and physical risks. These investment strategies require systematic, comparable information about ESG performance for both investments and industry peers.
This year marked a new milestone for ESG transparency for real assets and, in turn, the availability of actionable data for infrastructure investors. The GRESB Infrastructure Assessment covered 75 funds and 280 assets, and 25 portfolios completed the Debt Assessment (Figure 1, p.18), a 75 percent increase from 2017.
More progress on global goals
There are many dimensions to corporate environmental, social, and governance performance. Over the past several years, the United Nations Sustainable Development Goals have emerged as a widely accepted framework to describe and communicate important transnational priorities.
Perhaps the most fundamental SDG is the aspiration to limit global warming to 1.5 degrees Celsius. According to the best-available climate science, this requires global aggregate greenhouse gas emissions in 2050 to be 40 to 70 percent lower than 2010 levels. This dramatic reduction in global emissions requires contributions from all sectors, critically including infrastructure.
The new 2018 data show GRESB infrastructure participants taking several steps to support the GHG emissions reduction, including: Assigning responsibility for ESG performance to a senior decision-maker (97 percent); Setting short-term and long-term GHG emissions targets (24 percent and 28 percent of participants respectively); Reporting on 2017 GHG emissions (65 percent).
Infrastructure participants setting targets and reporting performance averaged a 1.1 percent reduction in Scope 1 and 2 GHG emissions during the reporting year (Scope 1 GHG emissions include direct combustion of fossil fuels and release of heat-trapping refrigerants and similar chemicals while Scope 2 GHG emissions typically include indirect emissions associated with purchased electricity, steam, and similar energy sources).
Infrastructure emissions are somewhat different from other asset classes, as they are intimately associated with productive services, such as provision of transportation and water treatment. Absolute reductions in these emissions must be interpreted with respect to the level of service or output provided by the infrastructure.
In practice, this requires looking at the intensity of GHG emissions per unit output or value. This provides a more meaningful measure of the relationship between productive work and, in this case, climate pollution. Productivity varies significantly within and among types of infrastructure investment (Figure 3, p. 17). Some types are very efficient at generating work or revenue per unit emissions, while others are more emissions intensive. These differences are not necessarily better or worse per se (i.e., air transportation is necessary despite the fact emissions intensity is higher than for rail investments).
Moreover, reported intensities are also dependent on decisions about reporting boundaries, scope, and other accounting factors. Specific guidelines or recommendations for these decisions is often not readily available, and, consequently, results may not always be comparable. At this point, intensities represent a useful starting point for engagement and improvement over time.
More Focus on Resilience
ESG managing and reporting are dynamic, and periodically new issues emerge as important considerations for investors and real-asset managers.
The past year marked a new focus on resilience: the ability of infrastructure to survive and thrive under social and environmental shocks and stressors. In 2017, a string of global weather-related disasters resulted in $344 billion in damages, including $212 billion in uninsured losses. This new high watermark reflects a combination of social and environmental factors that have put more people and property at risk. Infrastructure investors are particularly exposed to these issues, as the value of relatively long-term, illiquid assets is intrinsically linked to their location and the circumstances of the surrounding community.
High-profile shocks have helped raise awareness among institutional investors, and, in late 2017, the Financial Stability Board’s Task Force for Climate-related Financial Disclosure provided new recommendations for reporting. These circumstances motivated GRESB to introduce a new Resilience Module as a supplement to the GRESB Infrastructure Assessment. The module was broadly aligned with TCFD recommendations, and, when combined with related indicators in the core assessments, this provided nearly 150 resilience-related data elements for each participant.
The new results provide a unique picture of how infrastructure companies and funds from around the world are beginning to address resilience (Figure 5). More than 80 percent of respondents report designating an internal leader and establishing clear lines of communication and accountability through cross-department teams or working groups. More than 60 percent of respondents report identifying and engaging stakeholder groups and taking action to reduce risks during new construction and operations. Fewer than half of infrastructure respondents report systematically tracking the impact of extreme events and near-misses.
Responses to individual resilience-related indicators are interesting and important. However, the elements of leadership, risk assessment, business strategy, and performance measurement need to be used together to promote resilience. The conjoint analysis of these factors is reflected in a measure of comprehensiveness of the response of each company.
The breadth of responses is not necessarily an indicator of quality or risk management; however, it is likely to be indicative of the comprehensiveness of an organisation’s approach to resilience. Participants were segmented to examine differences in responses between four market segments (Figure 6). On average, infrastructure participants in the top 25 percent of participants provided responses for 74 percent of answer choices, while participants in the bottom 25 percent provided information for 12 percent of answer options.
These results show that infrastructure companies around the world are beginning to pay attention to resilience. Most respondents have: Established clear internal leadership; Conducted social and environmental risk assessments; Begun implementing strategies during development, operations, and acquisition; and Some are collecting data about shocks, stressors, impacts, and near-miss events.
However, the new data also show significant variation across the market, even in this self-selected group of GRESB participants. This means efforts to promote resilience cannot be taken for granted or assumed by institutional investors, and investors need to ask targeted questions to understand how infrastructure managers are addressing social and environmental risks.
Implications for investors
These results provide clear signals for infrastructure investors: High-quality information about environmental, social, and governance performance is more readily available than ever before. GRESB participants are reporting contributions to global goals, including target setting and performance reporting. Market leaders are increasingly focused on risks and opportunities associated with social and environmental shocks and stressors.
These observations help engaged infrastructure investors ask critical questions to understand leadership or identify potential weaknesses in their portfolios. This will help them manage risks and returns, while potentially helping to address global challenges.