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Infrastructure funds expect to grow green assets more than a fifth by 2022

Facts summary as below:

  • Climate-resilient real estate and electric vehicles are the top green targets for European infrastructure funds, with the US, UK and Asia in line for surge in investments
  • After growth potential, ESG credentials and transparency are the most important factors fund managers consider when managing portfolios
  • Covid-19 has ‘rewritten the rules’ on risk management, with 7 in 10 fund managers saying the pandemic has effected how they manage risk
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“ESG” in the broadest sense covers environmental, social and governance issues. But perception regarding details of the meaning and focus areas can vary. ESG investing often refers to “sustainable” or “responsible” investments, which seek positive returns and a long-term impact on society, and/or the environment and performance of a business.

This report aims to provide a view on key trends and challenges surrounding ESG for infrastructure funds, implications of different ESG ratings, ESG considerations in the investment cycle and credit ratings considerations, in addition to considering the outlook for ESG in the infrastructure sector and response to key issues impacting infrastructure funds.

97%

of infrastructure companies are exposed to environmental, social and governance risks

Key findings

1

Finding 1

97% of infrastructure companies with core and non-core infrastructure assets are exposed to social, environmental and governance (ESG) risks that have some potential to impact their credit ratings if the risks are not actively and appropriately managed.
2

Finding 2

Infrastructure funds have been incorporating ESG in their investment strategies, from embedding it in their purpose and values to looking for value-creating opportunities, valuing targets, and working with management teams to boost the long-term value of assets.
3

Finding 3

Infrastructure funds with typically controlling shareholders and with a long-term investment horizon are in a unique position to work with management to embed ESG values into company culture, driving purposeful investment and promoting opportunities such as energy transition, diversity and inclusion in boards and improved financial transparency. Many funds incentivise management accordingly to facilitate implementation.
4

Finding 4

According to studies, ESG often drives value through boosting the long-term valuation of a company, improving its financial performance as well as lowering its cost of financing and its operational costs. Businesses that profitably solve problems for people and the planet and avoid profiting from creating problems for people and the planet are more attractive to investors, talent and society.
5

Finding 5

Most infrastructure funds see ESG as a value-driver which presents an opportunity to improve the resilience and sustainability of portfolio companies in a rapidly changing world although a certain risk remains as related costs may not be (fully) reimbursable.
6

Finding 6

Understanding and measuring the impact of ESG is of increasing relevance to investors and other stakeholders. This has led to many ESG scoring and rating providers emerging, with each offering a unique approach or framework as a differentiator. This adds complication to the meaning of ESG and the search for a consistent and appropriate measurement.
7

Finding 7

ESG is now being considered by credit rating agencies when providing their credit ratings on companies, which could affect their cost of capital and their ability to raise funds in the market, thus also impacting the value of a company.
8

Finding 8

Public levels of interest in ESG investment have grown very significantly over the past 12 months. ESG factors are being  interpreted in EU regulations as sustainable finance. The focus on ESG by investors, companies, governments, regulators and consumers is going to increase: climate change, corporate purpose and supply chains are three areas where ESG will become more important in the years ahead.
Sebastien Daub

 

Investors nowadays are no longer only concerned about maximizing profits, but take a more holistic approach and look also at the purpose and impact on investments for the wider society. This goal quickly affected the market, as advisors contractors, suppliers etc contribute to the process. The challenge is to adequately reflect this in a transaction process and documentation.
Sebastian Daub, Partner and Global Co-Head of Infrastructure
Vanessa quote

 

Climate change is a critical challenge for business. Its effects are already being felt and may cause significant changes to ways of doing business and consideration of financial risk. The earlier companies this about ESG, the better.
Vanessa Havard-Williams, Partner and Global Head of Environment and Climate Change 

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