What Is The Role Of ESG In Infrastructure Investing?

The United Nations Environment Programme defines Sustainable infrastructure as “infrastructure that is planned, designed, constructed, operated, and decommissioned in a manner that ensures economic, financial, social, environmental, and institutional sustainability over the entire lifecycle”.

Infrastructure projects encompass a diverse range of subsectors, including renewable energy generation (wind and solar projects) transport, telecom, and social infrastructure.

According to the OECD report from January 12, 2023, by 2040 the difference between infrastructure needs and investment (the infrastructure financing gap) is estimated to be US$15 trillion. It is true that the public investment supported by Governments is needed to reduce the gap, but it is not enough. It is necessary that Governments create an environment of alignment between private investors and public institutions to make it possible to fill this gap.

The G20 governments over the last 2 years, mainly post COVID, issued multiple packages of incentives to help to define and clarify the rule of infrastructure investment as the fuel to sustainable growth and to make this transition to a low carbon economy as fast as possible, a reality.

Plans such as the Bipartisan Infrastructure Deal in the United States, National Infrastructure Strategy in the United Kingdom, European Union’s NextGen program, G20’s Roadmap to Infrastructure as an Asset Classes Glasgow Financial Alliance for Net Zero launched at COP26 in November 2021 are examples of clear plans with this scope.

Private investors need more than ever the support of the authorities and Governments to have the most accurate database where their analysis can be based to help them in the decision making process. Regularly we hear about greenwashing but to avoid it, first and foremost, we need to be able to guarantee accuracy of data where decision makers base their conclusions.

As institutional investors increasingly seek to increase their connection to green assets and projects, to try and increase their own sustainability for the long term, it is anticipated that interest in sustainable infrastructure debt will continue to grow.

Barriers for investors to further ESG incorporation

The lack of accurate data makes the decision making process very complicated and sometimes accusations of greenwashing are simply the result of lack of accurate measurements to positive and negative externalities related to Environmental, Social and Governance impacts.

Investors to be able to make the right decision need to be able not only to measure targets, goals and plans that projects have regarding ESG, but they need to be able to have accurate quantification of the externalities coming from each of these three pillars of sustainability. Amid the heightened interest around sustainable investing, there is emergence of credible reporting standards while investors too are willing to share metrics and information that allow proper benchmarking.

The existence of the right resources in firms is critical to guarantee that specialisms in ESG matters are part of the process of measurement of impact of investments and such specialised resources are not always available or present in the majority of firms.

Conclusions

The role of infrastructure finance as a catalyst for sustainable growth and as an enabler of the transition to a low-carbon economy has become evident day after day in the last years. Giving space to private investors is mandatory and essential to be able to fill the infrastructure financing gap and allow the full power of infrastructure projects to be felt by economies.

Investors are open to be part of green projects more than ever, as well as investing in socio economic inclusion because now they understand that it is mandatory for the sustainability of economies, for their own long term existence but mostly for the survival of the economy and the world as we know it today.

Sustainable infrastructure debt is gaining momentum and we need it to succeed in the complex transition to a low-carbon economy.

-The author is founder & CEO of Ethos Asset Management. Views expressed are personal.