As well as considering the ESG credentials of an infrastructure project, investors should also consider resilience. Christopher Marchant reports
Read the first part of this feature on ESG data for infrastructure here.
Materiality
As for how to distinguish infrastructure projects as varied as cattle farms and mast towers, a key step is in assessing for each project what factors are most material for investors.
Refinitiv's Saunders Calvert says: "There are industries that emit an incredible amount of greenhouse gases, such as oil and gas or metals and mining. There are some industries that are incredibly low carbon-emitting and low in carbon intensity – emissions are a much more material data point for those high carbon-emitting sectors.
"But if you're a social network, cybersecurity practices are much more material, as a data point, than carbon emissions. A data point, therefore, contributes far more to a company's ESG score if it's more material.
"There are also implications for non-disclosure, as companies that don't disclose material data points effectively forgo points that contribute to the ESG score."
According to Walters at GRESB: "We have a built-in integrated materiality assessment which interrogates the difference between the assets both in terms of sector and other factors. Everything is assessed then on what are the most material ESG issues for their situation, and that takes things into account whether they are just a landlord of a port or if they oversee every aspect of an airport, or whatever else they might be."
Walters gives the example of a rail rolling stock company. When assessing its ESG rating, what must be considered is how it might be compared against another similar business, and whether focus should be on the stock itself or how the business manages areas such as the energy efficiency of its offices.
There are a number of infrastructure data providers, which can lead to inconsistencies in ESG data. As well as the previously mentioned GRESB and LEED, the Schroders infrastructure debt scorecard analyses 48 micro risk criteria, 13 of which specifically relate to ESG.
Alexander Rietz is the portfolio manager for infrastructure at KGAL Investment Management. Of this issue he says: "A common concern revolves around, how to collect the data points. This can be put down to variances in methodology, and how it is calculated.
"Yet, while you can go into this qualification of various aspects, the main factor is that at least you are tracking your ESG footprints. Regardless of sector, what is important is that infrastructure is continuously trying to make progress."
KGAL also provides an example of a project they do not invest in due to a poor ESG score; biomass power plants. This is due to the judgement that, from a social perspective, the intensified use of biomass as a renewable energy source competes with other possible uses.
'Energy crops' specially grown on fertile arable land are in direct competition with food and feed production, but also with material use (e.g. bio-based plastics or chemicals).From an environmental perspective, the increasing demand for biofuel can lead to the need to import palm oil, as the domestic demand may not be continually satisfactory. This can be regarded as highly counterproductive, leading to increased emissions and extensive clearing of rainforests.
As well as the construction of an asset – which is the primary focus of the Equator Principles, for example – a critical area for ESG data is in the operation of a project. Zadek compares the lifecycle of carbon compared to carbon emissions used through the construction of the asset, noting that the carbon efficiency in building a bridge may be largely irrelevant if it is to host millions of petrol-fuelled vehicles over its lifespan.
Resilience
Resilience is also a key consideration for coastal areas that may be more impacted by a changing climate, and Zadek points to projects designed to resist more extreme weather, from South Africa to Puerto Rico.
"The quality of data currently available is not even close to being able to tell you whether an infrastructure asset is going to be resilient or not" – Chandra Eastwell, Macquarie
However, even with these changes resilience must be considered, even in spite of any potential social impact: "If you're a bank being asked to make a loan to a farmer on the Western Cape [in South Africa] that has for generations grown oranges, you may know that drought conditions on are in an unprecedented state. This is part of a long term pattern due to climate change and that will affect your risk pricing of that loan," says Zadek.
In the case of Puerto Rico, following the destruction reaped by Hurricane Maria in 2017, its energy infrastructure was given an F grade for its physical condition by the American Society of Civil Engineers. (America as a whole received a D+ grade.)
In the aftermath, there was an increase in the construction of climate-resilient projects. But, ironically, solar power was rejected as a large-scale option for regeneration due its susceptibility to future damage by extreme weather, and the ten-year plan issued by governor Wanda Vazquez focused instead on natural gas.
"There may be improved risk pricing in this area, but we're not yet seeing the upside which is how you make infrastructure more climate-resilient as opposed to how you price climate risk into the cost of capital. These should be mirror images of each other, but they're not", says Zadek.
MIRA's Eastwell says: "The ability of an asset to keep performing its function to the community is absolutely intrinsic to its benefit. It's essential to its financial performance, but more importantly, its social licence to be in that community.
"Whilst data can provide useful insights, resilience is incredibly nuanced and complex – the quality of data currently available is not even close to being able to tell you whether an infrastructure asset is going to be resilient.
"Data points can be useful in that analysis but it's not something that's going to be solved by a rating, in my opinion."
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.
The BlackRock approach
Teresa O' Flynn is global head of sustainable investment strategy at BlackRock Alternatives Investors (BAI), which has $200 billion in AUM. This strategy stretches across a platform including private equity, private credit, public credit, hedge funds, real estate and infrastructure.
The great majority of BAI's infrastructure investments are in the private sector. The total infrastructure AUM is $26 billion of which $836 million is listed, just 3.2% of the total.
ESG data at BAI is sourced through legal documentation, environmental reports, and permits that, according to O'Flynn, are "part and parcel" of the infrastructure project itself. BlackRock has also developed a proprietary ESG questionnaire intended to underpin due diligence across its global infrastructure business.
From an environmental perspective the questionnaire looks at areas such as certifications and compliance, climate risk and resilience, and resource use and management.
Under the social components, areas looked at include labour management and associated practices. Another component is social resilience, specifically judging how resilient a project may be to changing social perception and attitudes over time.
While BlackRock focuses mainly on project-level investing, in some cases it will make investment at the corporate level. It is focused on governance structure, business integrity and if it is a corporate investment its governance practices.
