What does the data in our reports reveal about trends in responsible infrastructure investment? | blog post

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According to our analysis of signatory reporting and assessment data, four out of five PRI signatories who invest directly in unlisted infrastructure say they use ESG factors to identify investment risks in their portfolio.

In 2021, 214 direct infrastructure investors reported to the PRI on their responsible investment activities, and insights gathered from these signatories highlight several key responsible investment trends in the asset class. In this blog, we describe some of these findings.

A large majority of these signatories said that ESG factors help them identify risks. Additionally, 80% also said they have discussed ESG factors at the investment committee level for all of their infrastructure investments.[1]

However, quantifying ESG risks and opportunities remains an obstacle for investors. A 2019 report by WWF pointed out that investors are not sufficiently integrating ESG measures into their assessment of infrastructure investments.

And according to our data, at least a third of respondents said these factors had no impact on their financial assumptions (revenue, capital and operating expenses, cost of capital) or the price they offered or paid for one of their investments during the reference year. .

The actual practice is of course nuanced, and our conclusions could reflect the fact that it is difficult to isolate the impact of ESG factors in financial assumptions, unlike infrastructure investors who do not take them into account at all.

Nonetheless, the gap clearly shows that infrastructure investors would benefit from a better understanding of existing best practices and more tools to improve their ESG integration efforts.

Examples of the latter are already emerging: WWF has published a guidance note on integrating ESG factors into financial models for infrastructure investments; while the Coalition for Climate Resilient Investment recently released its Physical Climate Risk Assessment Methodology, which aims to help infrastructure investors integrate physical climate risks into investment assessment practices.

Signatories focus on environmental factors

Our reporting data also shows that infrastructure investors are focusing more on environmental factors, particularly climate change, rather than the full range of ESG factors that can impact their investments.

For example, more signatories use TCFD guidance or other climate-related information (45%) than tools such as the GRI (14%), SASB (32%) or GRESB (28%) standards when they analyze the importance of ESG factors for their infrastructure investments.[2]

This is understandable to some extent. Not only because of the regulatory, customer and public attention on the subject; but because infrastructure investors can be at the forefront of the global transition to a low-carbon economy, investing in and delivering renewable energy and other critical infrastructure to support decarbonization.

However, it is important that other factors are not overlooked.

For example, obtaining and maintaining a social license to operate continues to be an essential part of infrastructure investment, perhaps more important than ever, given the economic and political upheavals that are occurring. around energy security, energy transition and high inflation, among other factors.

Stakeholder engagement is a critical step in this process: insufficient and inadequate engagement can lead to construction delays and interruptions to the operation of an asset, affecting the size and likelihood of future cash flows.

As shown in the figure below, many of our infrastructure signatories report that their responsible investment policies included guidance on how they engage stakeholders – from the workforce of their assets to parties. external parties such as contractors, governments, local communities and end users. But there is still work to be done to ensure that infrastructure investors systematically engage stakeholders throughout the investment process.

Figure 1: Percentage of infrastructure signatories covering the following guidelines in their RI policies (INF 1)

Chart showing the percentage of infrastructure signatories covering specific guidelines in their responsible investment policies.

These shortcomings are likely to come under increased scrutiny, given the increasing demands by regulatory authorities and clients on investors to meet their human rights obligations. . The United Nations Guiding Principles on Business and Human Rights (UNGPs) require investors to consult meaningfully with stakeholders as part of their human rights due diligence processes[3] – failure to do so may create potential reputational and legal risks for them.

To this end, the PRI has begun to develop guidance for private investors in the market regarding the implementation of the UNGPs, which will address areas such as stakeholder engagement.

Formalization of the asset owner – investment manager relationship

A final theme to highlight is the extent to which responsible investment commitments are, or will need to be, formalized in legal agreements between asset owners and their investment managers.

With groups such as the Net Zero Asset Owners Alliance, which has 78 members representing $10.8 billion in assets under management as of October 24, 2022, growing in size, asset owners will increasingly demand of their external managers that they make commitments compatible with their own.

Our data shows that many infrastructure signatories are already building responsible investment provisions into fund terms, with around 51% of respondents incorporating these commitments into limited partnership agreements as standard procedure by default in 2021.[4]

However, for these commitments to be effective, the incentives of asset owners and managers must align, and asset owners must have a clear escalation strategy in place to penalize managers who fail to meet their responsible investment commitments.

On the first point, the data suggests that the majority of the 151 indirect infrastructure investors[5] which published last year already assess external managers against a range of responsible investment criteria for all their investments, including aspects of corporate culture such as manager incentive structures, when their selection process (Figure 2).

Figure 2: Proportion of indirect infrastructure investors rating aspects of their external managers’ organizations against responsible investment criteria (SAM 3)

Bar chart showing the proportion of indirect infrastructure investors rating aspects of their external managers' organizations against responsible investment criteria.

Regarding the second element, we observe that nearly 90% of indirect infrastructure investors report having a formal escalation process in place, and just under 50% of respondents include divestment in these processes.[6]

Figure 3: Actions that indirect investors (or their investment consultants) include in their formal escalation processes (SAM 22)

Bar chart showing actions that indirect investors (or their investment consultants) include in their formal escalation processes (SAM 22)

With a growing secondary market, divestment is an increasingly credible threat. Over the next four years, the secondary infrastructure market could exceed $15 billion, more than double what it was last year, according to the IPE.

The manager’s reasons for escalation must be agreed at the appointment stage and will vary depending on the indirect investor’s responsible investment approach.

This may include, for example, not systematically integrating incentives for improving ESG performance into the remuneration systems of the managers of portfolio companies. Less than half of our signatories say they do so for their infrastructure investments, with that number dropping to 10% when considering those headquartered in emerging markets.[7]

Signatories are making progress, but there is room for improvement

Overall, there is a lot to be positive about responsible infrastructure investing. Our formal and informal interactions with signatories increasingly underscore their commitment to the concept of sustainable infrastructure – projects that support key sustainability outcomes such as net zero or manage ESG risks such as health and safety of workers and corruption.

Nevertheless, as the data in our reports suggests, there are still areas where more can be done – we will continue to support signatories who want to strengthen their responsible infrastructure investment practices.

Consult our infrastructure work program

This blog is written by PRI staff members and guest contributors. Our aim is to contribute to the wider debate around topical issues and help showcase some of our research and other work we undertake to support our signatories. Please note that while you can expect to find articles here that broadly reflect the official views of the PRI, the blog authors write in their individual capacity and there is no ‘inside view’. The views and opinions expressed on this blog also do not constitute financial or other professional advice. If you have any questions, please contact us at [email protected]