Tokyo Summit: ESG is for ‘downside protection’

Japanese LPs must look beyond returns when seeking to incorporate sustainability considerations into their investment strategies, delegates heard today.

In Japan as well, ESG considerations play a key role in LPs’ decision making regarding infrastructure, panellists noted on the second day of Infrastructure Investor ‘s Tokyo Summit.

ESG integration, already common practice in real estate, is following a similar trend in infrastructure, said Emke Bus, managing director of ESG and infrastructure at GRESB.

However, Takaaki Hoshino, a senior vice-president at the Development Bank of Japan, noted there is no “textbook” strategy to ESG but more of an “ad-hoc” approach. “It is difficult to implement ESG as there are no guidelines to follow. Investors need methods to measure and examine their ESG strategies.”

Fund managers’ ESG reporting forms an important part of that evaluation, said Andrea Echberg, a partner at Pantheon Ventures. “For direct investments, if we discover something we don’t feel comfortable with from an ESG point of view, we would decide not to proceed with the investment opportunity.”

Asked whether they would invest in an asset with attractive returns that does not fulfill their ESG criteria, two investors sitting on the panel said they would give it a miss.

“In general, ESG policies are not there to help generate upside. They act more like a downside protection,” said Hoshino. If a portfolio company does not comply with ESG standards, he argued, it may create problems, hurting returns in the long run.

Hoshino then cited two transport projects – a toll road and a tunnel under construction – as examples where working with the local community enables smoother project development and delivery.

“ESG is an important part of our decision-making process,” Echberg echoed. “It is a relatively new term, but putting it front of mind is fundamental to manage risks.”

Echberg said good ESG practices could help boost an asset’s value, thanks to improvements in management and governance as well as better communication with shareholders. Poor environmental oversight, by contrast, could have severe financial impacts, she observed.

The incorporation of ESG into infrastructure investments is still at in an early stage, Bus said. Strategies are being developed in the areas of management and policy, with the implementation and measurement of ESG performance expected to follow.

She stressed that the standards set for ESG in infrastructure should take into account the asset class’s unique characteristics, rather than mimicking real estate.

Ryuichi Horie, chief executive and co-founder of CSR Design Green Investment Advisory, noted that calls for proposals on alternative investments by the $1.3 trillion Government Pension Fund of Japan, which include ESG criteria, could help boost the practice’s profile.