With its broad scope from airports to hospitals, wind farms to oil pipelines, assessing ESG data in the infrastructure sphere comes with a wide array of challenges. Christopher Marchant spoke to experts in the sector about the ongoing push for in standardisation and disclosure.
Among many environmental, social and governance (ESG) data providers in the infrastructure sector, GRESB (formerly the Global Real Estate Sustainability Benchmark) is a significant operator. Building on its initial real estate offering for environmental, social and governance (ESG) data, GRESB has since 2016 offered a scoring benchmark for the infrastructure sector, targeted at asset operators, fund managers and those investing directly in infrastructure.
The assessment was founded after infrastructure investors including APG Asset Management and PGGM identified a gap in the market − namely that, unlike in the real estate sector, there was no tool for investors to assess the ESG performance of their investments. In 2019, GRESB's Infrastructure Fund Assessment grew by 43% to include 107 funds, covering more than $4.5 trillion in real asset value.
Rick Walters, infrastructure director at GRESB, outlines what its assessments look for: "There are a number of aspects that are covered, including both management-style and performance-style, related to the actual performance of funds and assets.Within that, are areas such as policies, reporting, risk assessment and stakeholder engagement."
Macquarie Infrastructure and Real Assets (MIRA) is the world's largest provider of specialist funds that focus on infrastructure, with $129 billion in assets under management (AUM).With 156 portfolio businesses, it has undergone a huge intensification of its data collecting practices, especially within the past two years.
MIRA mainly focuses on brownfield infrastructure investment (previously developed land), using its own due diligence providers to assess those assets instead of relying on third-party, outward-facing data.
In its due diligence practices, MIRA uses a checklist based on international standards, looking at a wide range of inputs from Leadership in Energy and Environmental Design (LEED) compliance, systems and safety, to environmental considerations in areas such as water and waste, and carbon emissions.
All projects are also assessed under Macquarie's group-wide Environmental and Social Risk (ESR) policy and ESR assessment tool during the investment decision making process.
On the collection of data in-house, Chandra Eastwell, senior manager for ESG at MIRA, says: "Collecting ESG data on unlisted infrastructure assets is quite different to what is done in the listed space, which often utilises external providers such as MSCI and Sustainalytics to give them an outside view.
"We're lucky enough to be able to work with our portfolio companies and our diligence providers to get our own balanced view of how an asset is performing. We don't need an external rating to extrapolate that out."
Simon Zadek is the lead for the UN Secretary-General's Task Force on Digital Financing of the Sustainable Development Goals (SDGs). His position allows advanced insight into how technological developments are overhauling the quality and process for the collection of ESG data for infrastructure.
"Infrastructure is going through a dramatic change, and we're seeing the development of a generation of infra-tech which is data-enabled.
"We still think of infrastructure as a bunch of cement." (See box for more details on cement.)
"There is still cement, but if you think of energy systems and the built environment, if you think of agriculture investment, all of these areas are becoming digital-enabled, and that's hugely important, as real time data can be acquired in unprecedented ways. Something can be analysed before it is built, in addition to real-time data flows," says Zadek.
Zadek cites the example of Planet Labs, the world's largest ever constellation of satellites providing massive amounts of daily satellite imagery, and able to observe large infrastructure developments in real time.
The Chinese government is already using satellite technology to oversee projects encompassing its international infrastructure Belt and Road Initiative (BRI), he says. In terms of technological developments, financial markets data provider Refinitiv hosts decision-making and data accessibility platform Eikon.
There are 7,000 publicly listed companies covered within the ESG dataset at Eikon, accounting for 70% of global market capitalisation. The ESG scoring system itself is proprietary to Refinitiv and is compiled by analysts in-house.
Within Eikon, Refinitiv hosts the BRI Connect App, which sources data on China's Belt and Road initiative. However, BRI Connect data is not yet ESG-linked. Leon Saunders Calvert, head of sustainable investing and fund ratings at Refinitiv, explains the reasons behind this: "We are taking what we have in the BRI app and looking to turn that into a global infrastructure database.
"The intention, as part of that, is to better capture sustainability-related data points on those infrastructure projects. We want to take it further but we are encountering roadblocks with things like the levels of disclosure."
Saunders Calvert points to investor pressure driving company disclosure in the infrastructure ESG space. But without mandatory reporting of data, it is likely that infrastructure companies divulging this information will remain in the minority, he suggests.
The UN's Zadek considers how new technologies and the need for ESG data disclosure for infrastructure might combine: "Historically, the expectation has been that whoever is building infrastructure has got data that will be reported in some way.
That is classic corporate disclosure of ESG data, and what we need to understand now is that we've got infrastructure itself shedding data and a world of big data that is very rarely coming from corporate sources directly, particularly on the environmental side."
Emerging markets
Core divides in the availability and quality of infrastructure ESG data relate not only to rates of disclosure by companies and projects, but geographically, especially emerging market versus developed market.
GRESB's Walters says: "In the emerging markets, we need the infrastructure data even more. The gaps are bigger, the opportunities are bigger, and the benefits that are contributed to those local economies, are much bigger, per dollar, than in the OECD. The opportunities are enormous, and I think the value proposition is very clear, it's just overcoming some of those barriers to getting the take-up there.
"China is a good example. We need Chinese investors saying 'This is important to us', setting the example for others, and that way you start to get a critical mass effect in those markets."
Launched in 2003, the Equator Principles are a risk management framework, adopted by financial institutions for determining, assessing and managing environmental and social risk in development projects in emerging markets. Areas of focus include protection of indigenous populations, and convergence around common environmental and social standards. It has been adopted by over 100 companies across 38 countries, including ABN Amro, JP Morgan Chase and Societe Generale.
"In the emerging markets ... the gaps are bigger, the opportunities are bigger, and the benefits to those local economies, are much bigger, per dollar, than in the OECD. The opportunities are enormous" – Rick Walters, GRESB
The Equator Principles faced criticism last August, when a proposed revision was accused of not going far enough in respecting the rights of indigenous peoples affected by major investment projects, according to more than 50 institutional investors.
The revisions to the Equator Principles were passed in December, and allowed exception to the Free, Prior and Informed Consent of Indigenous Peoples in infrastructure projects in under circumstances where certain consultation requirements had been followed.
While offering an international standard, its effectiveness in standardising data may be more limited:
"When looking at standardisation of the performance element, the Equator Principles can be quite prescriptive and they're not really data-driven. It's a pretty low baseline and it doesn't help that much with standardisation other than identifying what are the key issues, and GRESB is already aligned with that," says GRESB's Walters.
The second part of this feature on ESG data for infrastructure, to be published next week, will look at the issues of materiality and resilience.
This article is part of a series of features exploring ESG data.
- To read 'The ESG data files – introduction, click here
- To read 'The ESG data files – part one: reported data', click here
- To read 'The ESG data files – part two: non-reported data', click here
- To read 'The ESG data files – part three: ESG rating agencies', click here
- To read 'The ESG data files – part four: fixed income data', click here
- To read 'The ESG data files – part five: the impact of the EU's taxonomy', please click here
- To read 'The ESG data files – part six: TCFD and the challenge of looking forward', click here
- To read 'The ESG data files - part seven: Building data for real estate', click here
This series of features will be published alongside a directory of ESG rating providers.
Further features on this theme may follow. Please email peter.cripps@environmental-finance.com with any thoughts.
Environmental Finance is hosting a conference on the theme of ESG Data, in London on 27 April.
Cement in its place
Cement remains an integral building block of most infrastructure projects – as well as a significant contributor to their environmental footprint.
According to a 2018 report from the Royal Institute of International Affairs, called Making Concrete Change, each year, more than 4 billion tonnes of cement are produced, accounting for around 8% of global carbon dioxide (CO₂) emissions.
To bring the cement sector into line with the Paris Agreement on climate change, its annual emissions will need to fall by at least 16% by 2030, said the report.
In the cement manufacturing process, 30‑40% of direct carbon emissions comes from the combustion of fuels, and the remaining 60‑70% comes from the chemical reactions involved in converting limestone to calcium oxide, according to a 2019 report on a proposed EU Taxonomy on sustainable economic activities.
The threshold set by the document for the sustainable production of cement is half a tonne of C02 emitted for every tonne of cement created. This represents a significant reduction on the status quo – according to the Intergovernmental Panel on Climate Change (IPCC), current cement production accounts for 0.8 tonne of C0₂ for every tonne created.
The EU Taxonomy report says: "The manufacturing of cement is associated with significant CO₂ emissions.
"Minimising process emissions through energy efficiency improvements and switching to alternative fuels, promoting the reduction of the clinker [lumps formed in the manufacturing process] to-cement ratio, and the use of alternative clinkers and binders can contribute to mitigation objectives."
The report from the Royal Institute of International Affairs looked at substitutes for clinker, such as fly ash from coal combustion, blast furnace slag, and more innovative sources such as volcanic rocks and ash as the production of coal and steel decreases.
The EU Taxonomy document concluded that, in the production of cement, the use of electricity from renewable energy sources could also be explored as a measure to reduce the electric intensity of the final cement product.
This could be achieved through different strategies including implementing renewables-based captive power generation, power purchase agreements that ensure electricity imports are provided from renewable sources, or demand-side response strategies that enable a flexible electricity demand.
The current GRESB assessment considers materials sourcing and resource efficiency from the viewpoint of whether organisations have policies in place, assess risks and monitor performance. However, GRESB does not specifically measure the performance in relation to the quantified embedded emissions associated with the project's construction (including the use of cement).
To address this, and other project development related issues, GRESB convenes an industry working group looking to identify the best approach to modify current assessments to provide enhanced measurability.