ESG-orientated investing may have exploded in recent years, but if it fails to add value, it risks becoming a mere compliance exercise. The good news is that there is much value to be gleaned from an effective, holistically integrated ESG campaign. And this ‘value’ can take many forms, including, but not limited to, reducing carbon emissions, limiting exposure to the impact of climate change, increasing revenues, cutting costs, attracting the best talent and securing the loyalty of long-term investors.

“ESG strategies need to go beyond risk mitigation, and actively consider how the pursuit of opportunities could enhance business performance and be value accretive,” says Kristina Kloberdanz, chief sustainability officer at Sydney-headquartered Macquarie Asset Management. “A clear framework, with ESG considerations embedded, should govern decision-making throughout the investment lifecycle – right from initial screening through to asset management and realisation.”

Being able to showcase to investors improvements in sustainability is central to building value, particularly at exit. Lowering methane and greenhouse gas emissions, or achieving other decarbonisation targets, reduces the risk of climate litigation, failing environmental regulations and assets becoming stranded as we transition to a low-carbon economy.  

As a case in point, The Carlyle Group uses the Global Reporting Initiative Standards to communicate ESG issues to stakeholders. The manager reports on environmental risks such as energy consumption, energy intensity, and Scope 1 through 3 emissions; last year it released its first TCFD-aligned report. The firm also tracks climate-related KPIs and portfolio carbon footprinting such as renewable energy purchases, energy usage and energy efficiency targets.  

Demonstrating what can be achieved, Schroders presents the example of a rail operator achieving a 33 percent energy saving after the first season of installing a cooling system to maintain requisite temperatures – saving the equivalent of enough electricity to run 1,000 households. 

Such efforts may see immediate results, but it is also important to acknowledge that infrastructure investors generally deal in significant time horizons. In this asset class, where developments are often deeply integrated into and impactful upon community life, investors must look far into the future to gauge the true value of a responsible investment. 

“Generating place-based impact does not need to involve sacrificing financial returns. In fact, they are often commercially aligned,” says Shuen Chan, head of ESG at Legal & General subsidiary LGIM Real Assets. “A stronger, healthier and more dynamic local economy has the ability to nurture the occupier communities of tomorrow, and long-term investors can play an important role in catalysing the change.” 

‘Fit for the future’

Against the backdrop of the accelerating energy transition, positioning infrastructure assets for the longer term represents the intersection of value creation and risk management.  

On the one hand, the risk of assets becoming stranded or cheapened by a lack of environmental suitability is managed by ESG screening. For example, last year The Carlyle Group conducted carbon emissions analyses across most of its private equity investments to identify the areas of highest potential value-at-risk from the energy transition, and the findings were presented to senior management. The firm also screens exposure to carbon-related regulations and associated potential threats to valuation at exit. On the other hand, there is also an opportunity for managers to accelerate the transition. And in an era where public consciousness on environmental issues is at an all-time high, demonstrating this to investors is sure to be a valuable exercise. 

“It is about creating value by positioning investments to be fit for the future,” says Dan Watson, head of sustainability at Amber Infrastructure. “Whilst reducing risk is certainly one driver, creating value is more than just limiting the downside risks. We try to envision how our investments will support the transition, align with future expectations of good infrastructure and meet investor expectations.”  

“Whilst reducing risk is certainly one driver, creating value is more than just limiting the downside risks”

Dan Watson
Amber Infrastructure 

Indeed, there is evidence that value creation outranks risk management among motivations for pursuing an ESG strategy. In a 2021 survey of private equity firms by PwC, two-thirds of respondents said value creation was one of their top three drivers for responsible investing or ESG activity. In contrast, only 40 percent ranked value protection in their three main drivers. More than 70 percent said they integrate ESG risks and opportunities into their business transformation or value creation plan.

Interestingly, in PwC’s 2019 survey, risk management was labelled the biggest driver of ESG activity – clear evidence that we are witnessing a seismic change in attitudes towards responsible investing in private markets, and the potential for value creation therein.

“There is mounting empirical data that shows ESG value creation – whether it be from operating cost savings realised through asset optimisation initiatives, or preservation of asset value by futureproofing operations to prevent value erosion as the world progresses to net zero,” says Himanshu Saxena, CEO at fund manager Starwood Energy Group.

The argument for building a thorough, transparent and impactful ESG strategy in infrastructure investment is undeniably strong – and only getting stronger as time goes on. Although the mission is simple, the execution is multifaceted and complex. But private markets are evolving fast to facilitate a smoother path to value creation through responsible investment.

“Integrating ESG into the corporate culture, where all team members see the need for and benefits of good ESG management is, ultimately, what will ensure the genuine and effective implementation of ESG practices,” says Guido Mitrani, founding partner at Asterion Industrial Partners. “Delivering ESG success is about purpose, culture and values.”