Infrastructure investments: the importance of ESG

Partner Content: Sophie Durham from Igneo Infrastructure Partners examines why environmental, social and governance issues are crucial to successful investments in projects across the power, heating, transport and telecommunications sectors.

Within the investment world there have recently been two very distinct trends: greater appetite for real assets and an embrace of environmental, social and governance (ESG) issues. While real assets comprise a wide universe, one of the most favoured routes has been infrastructure, with investors attracted by its long duration nature, stable cash flows and relative inflation protection.

This being the case, potential infrastructure investors may be asking themselves some important questions. Not least, why exactly is ESG that important? What value does it really add? Is it just a cost to be borne, or an opportunity that adds value? These are all legitimate questions.

A lapse in service provision due to ESG-related failures, including safety or evidence of environmental pollution, can lead to political and regulatory scrutiny, reputational damage and possible financial penalties.

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What makes infrastructure unique?

 A good starting point is to consider the unique characteristics of infrastructure. These businesses often provide critical services to communities, such as power, heating, transport and telecommunications. Many are operating within a highly regulated environment. They are also likely to have a high public profile, putting them firmly on the radar of politicians, regulators and the media.

A lapse in service provision due to ESG-related failures, including safety or evidence of environmental pollution, can lead to political and regulatory scrutiny, reputational damage and possible financial penalties.

This is why ESG is particularly relevant to the management of infrastructure assets. Recognising these potential risks and their potential consequences serves as an incentive for company management to have robust ESG-focused frameworks in place.  But it is not just about mitigating risk – effective ESG engagement within infrastructure businesses adds tangible value.

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ESG – adding tangible value

 One of the most obvious benefits is staff retention. A feature of many infrastructure companies is the dependence on a highly skilled, technically sophisticated workforce. These organisations often utilise heavy equipment or operate complex engineering facilities – highly skilled engineers, IT experts and logistics experts are key. An employee engagement policy providing high-value training and development, a clear path for career progression and a fair, merit-based remuneration policy will greatly aid staff retention.

A commitment to health and safety is a further obvious factor. The high capital intensity within many infrastructure-based organisations elevates the need for high safety standards. The benefits are staff assurance, low absence rates and avoidance of fines/compensation for any safety non-compliance.

The importance of frameworks

Given its importance, large institutional investors need to have ESG evaluation at the core both of initial investment evaluation and also continual ESG engagement with management once an investment has been made. To illustrate how this can be achieved  Igneo Infrastructure Partners developed “Five Minimum Standards” – an ESG-based framework allowing the analysis and ongoing measurement of ESG best practice within investee companies.

One of the largest direct equity infrastructure investors within the sector, Igneo believes that in order to be credible, you need to be consistent.

Having such a framework provides a consistent approach to measure and exercise oversight of ESG performance within investments. As a direct infrastructure investor, often owning the whole business, it is comparatively easy for Igneo to undertake this role. However, any investor has a similar responsibility and, to maximise the value of their holding, should actively promote best ESG practice within their investments.

Implementation is key

 Implementation is the last component – a board-level commitment to embrace ESG values matters little if not enacted across the wider organisation. Experience suggests success is most likely if investors recognise that every business is different and the most effective approach is collaborative engagement with management rather than shareholder directives. Genuine partnership between shareholder and company delivers the most positive outcomes.

Overall investors should appreciate that ESG integration is not simply about being a good corporate citizen or seeking to de-risk an investment. These are certainly benefits, but the often overlooked aspect of ESG is the value accretion potential when these principles are properly considered and embedded within potential investments.

Sophie Durham is managing director, head of ESG, Europe, at Igneo Infrastructure Partners.

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