There is a line of thinking that infrastructure investments are inherently impactful. After all, building and operating infrastructure is for the public good – from the essentials of power and water to connecting people, goods and businesses. The arrival and growth of renewables has added a further dimension to this, given the urgent need to decarbonise economies.

However, when impact investing is all the rage, this view can be problematic. For example, two-thirds of investors responding to the latest annual survey by the Global Impact Investing Network (GIIN) said that ‘impact washing’ is the biggest challenge they face over the next five years. Infrastructure’s long-term nature also requires careful consideration. “The opportunity to make an impact through infrastructure investments is more nuanced than in other sectors,” explains Dan Watson, head of sustainability at Amber Infrastructure. “It’s important to understand how individual infrastructure investment supports wider systemic benefits for a healthy environment and robust social networks.” He adds that this requires a balance of serving short-term social needs with ensuring systems are sustainable over the longer term.

Rigour required

Defining and demonstrating impact in infrastructure is an issue that the International Finance Corporation has tackled over recent years. “Historically, everyone talked about infrastructure generating a disproportionate amount of impact,” says Omar Chaudry, who heads up the infrastructure economics and development impact team at the IFC. “But when we got into the weeds of how you articulate that impact in a measurable way, we found ourselves on weak ground – we couldn’t, for example, answer the question of how power provision impacted the populations in Africa’s markets.”

This conundrum led the IFC to create a framework around which it now views its infrastructure investments. This helps it to define and report on what it is seeking to achieve.

“We see impact in infrastructure in terms of three main outcomes,” says Emelly Mutambatsere, senior sector economist at the IFC. “Stakeholder impact, which covers users, suppliers and employees; social and environmental outcomes, such as climate change mitigation and adaptation or the provision of clean water; and economy-wide outcomes.

“People think that it’s a foregone conclusion that infrastructure has economic benefits, but we want to measure areas such as jobs created and look at aspects such as what our investment signals to the market more broadly.”

“Companies that contribute positively… are more valuable than those that don’t”

James Magor

Understanding intentions

The IFC, as a development finance institution, has always had an impact mission. The same cannot be said for infrastructure investing more generally, where positive impact has more likely been a side benefit than a defining purpose.

Some conditions must be met if one is to lay claim to impact. Intention to create specific impact identified from the outset of an investment is clearly among them. “Investing with intentionality in infrastructure that provides social and environmental benefits is an important marker of impact investing,” says Felix Hermes, head of private equity and sustainable infrastructure at BlueOrchard. It is also about additionality – the idea that the impact would not have happened were it not for the investor’s involvement.

Importantly, funds must be able to measure that impact as well as deliver a financial return for investors.

How that translates into practice varies. For Glennmont Partners, for example, it is about adding community initiatives to its overarching strategy. “We see ourselves as investors that target inherently impactful sectors and we overlay ancillary ESG initiatives,” says Jordi Francesch, head of asset management at Glennmont Partners. “Our renewables investments clearly result in the deployment of clean energy and therefore carbon emissions reductions, but we also contribute to community funds and establish trusts with local municipalities so that funds can be spent locally.”

For Amber Infrastructure, meanwhile, it is at least in part about providing funding and expertise to build markets. “We manage funds on behalf of local government and in areas that are hard to invest in, such as the Mayor of London’s Energy Efficiency Fund, but we also invest in early-stage infrastructure using Amber’s balance sheet,” says Watson. “Our aim is to help these areas become more investable over time.”

Some infrastructure firms are raising dedicated impact funds, such as Brookfield’s Global Transition Fund, which is seeking around $15 billion, while others eschew the ‘impact’ badge. Actis, for example, has always had an eye to the impact of its investments, having launched in 2004 as a spinout from CDC Group (now known as British International Investment), the UK’s development finance institution. It has also developed a proprietary impact measurement framework, the Actis Impact Score. Yet the firm prefers to use the term ‘sustainability’.

“Investing with a focus on sustainability makes commercial common sense,” says Actis’s director of sustainability, James Magor. “Our view is that companies that contribute positively – to the energy transition, for example, and/or to global social and economic development – are more valuable than those that don’t. It’s not a separate investment strategy; you don’t need an impact label because it can be misconstrued that the fund is not mainstream, that it has a less commercial focus.”

Investor interest

There is certainly plenty of interest in impact among institutional investors as they seek to meet, for example, their own net-zero targets. “It’s an exciting time,” says Amit Bouri, CEO of the GIIN. “There is a lot of discussion going on around how investors are thinking about impact across their entire portfolio.”

“We are doing a lot of work on how investors can think about cross-cutting themes”

Amit Bouri
Global Impact Investing Network

The energy transition away from fossil fuels is a driving force. “Clean energy and renewables are clearly a hot topic globally,” says Bouri. “The need to act is directing more capital here as institutional investors commit to net zero, the science-based targets and the Paris Agreement. There is a huge opportunity in this space.”

Yet there are many aspects to impact beyond the energy revolution. Bouri, for example, is keen for funds to think about impact more holistically. “We are doing a lot of work on how investors can think about cross-cutting themes,” he says. “That includes gender-lens investing, racial equity, job quality and climate change mitigation, including reducing emissions across the board.”

Peeling the onion

As the impact investing space has grown, we have seen a proliferation of measurement and reporting frameworks, principles and lists of appropriate KPIs. While the starting point for many is determining which of the UN’s 17 Sustainable Development Goals they are seeking to address – this is the most commonly used framework for impact investors, according to the GIIN investor survey – there are several layers beneath this.

The IFC’s Operating Principles for Impact Management (OPIM), for example, offers a systematised approach to generating impact, while the Impact Management Project (IMP) has sought a global consensus for talking about, measuring and managing impact. The GIIN has developed a set of metrics for different dimensions of impact under IRIS+, while the Sustainable Accounting Standards Board (SASB) has compiled 77 reporting standards on ESG issues – and there are many more.

Magor outlines Actis’s approach. “Measurement and KPIs are clearly important to monitoring and improving sustainability performance,” he says. “We draw heavily on the IMP dimensions because these have achieved something close to a global consensus around the key dimensions of impact. We were also a founding signatory to the IFC’s OPIM. If you are following both of these, you are largely in the right place.”

BlueOrchard has also developed its own impact system, which encompasses many of the prevailing guidelines, says Hermes. “We analyse the ESG characteristics of each investment, assess the potential for delivering impact, set concrete KPI-based impact targets, map the impact KPIs to the UN SDGs and report our impact performance on this basis,” he explains. “This proprietary impact management framework, B.Impact, is aligned with industry standards set by the PRI (Principles for Responsible Investment), IFC, IMP and SASB, among others.”

Balancing act

While many firms will want to report positive social or environmental outcomes to their investors, there is an increasing recognition that measuring and managing negative impacts is equally important. “We measure a whole range of impacts across our portfolio – both positive and negative,” says Glennmont’s Francesch. “These range from emissions avoided per kWh, job creation, health and safety, stakeholder complaints through to carbon footprint (including the lifecycle of products), emissions to water and the direct benefits to local communities, and so on.”

“The global community needs to keep an eye on the proliferation of impact measurement tools and frameworks”

Omar Chaudry
International Finance Corporation

Amber Infrastructure is of the same view. “We measure and report on both positive and negative impacts,” says Watson. “It’s important to look at how we reduce any potential adverse impacts so that we are not solving one problem only to have a negative impact elsewhere.” He points to the firm’s investment in the Thames Tideway super-sewer in London. “It is impactful in that it will prevent up to 37 million cubic metres of sewage overflowing into the river, which will clean it up and improve biodiversity.” However, the project will obviously have negative impacts – the use of concrete in large volumes for example – that need to be measured and mitigated.

Yet, there is still some way to go before more investors fully appreciate some of the trade-offs involved. “The emissions profile of new infrastructure can be high, but it can tail off once construction is complete,” explains Watson. “It’s important to communicate that some short-term negative impacts can create sustainable long-term change. Our investment in the Gold Coast electric light railway in Australia is an example of this – although building it resulted in emissions, it is reducing car usage by 50 percent.”

Magor makes a similar point about other types of infrastructure investment, demonstrating just how nuanced investing for impact can be. “Data centres are one example,” he says. “There is concern around their power intensity, but data storage is a necessity and digital infrastructure will be critical for transition. If you create large-scale data centres, they can be up to 90 percent more energy efficient than on-site data storage. The same goes for district cooling in the Middle East, where cooling systems are essential. By creating centralised systems, you can improve energy efficiency now and convert their power sources to renewables in the future.”

As the definitions, measurement and reporting systems for impact investment start to firm up and regulations improve transparency, it is clear there is growing potential for infrastructure funds to invest with integrity, sustainability and a whole lot of impact.

Enter the regulators

The arrival of the Sustainable Finance Disclosure Regulation in the EU may at least help clarify reporting requirements for impact funds.

Funds that fall under Article 9 – those with sustainable investments as an objective or those that target carbon emissions reductions – have to incorporate good governance into the investment strategy and assess the fund against the principle of doing no significant harm. They also need to align – at least partly – with the EU Taxonomy, which provides a classification of sustainable activities.

The UK is working on its own version, the Sustainability Disclosure Requirements (SDR), plus a UK Green Taxonomy. This will be different from the EU’s regime, but it is understood that efforts will be made to make the rules consistent to a degree.

“The SFDR, EU Taxonomy and the forthcoming SDR from the UK will help to create some standardisation of definitions, frameworks and disclosures,” says Amber Infrastructure’s Watson. “The requirement to report on adverse impacts is really helpful because that will drive transparency. However, there will be some limitations, and comparisons will remain difficult. Investors will need well-trained ESG analysts and embedded ESG processes to understand and act on the nuances.”

There are also efforts underway elsewhere to make the measurement and reporting of impact less labyrinthine. “The global community needs to keep an eye on the proliferation of impact measurement tools and frameworks,” says the IFC’s Chaudry. “While some may be pushing for harmonisation, this may not be possible. There is more talk today about interoperability of frameworks, principles and measurement systems.”