Sustainable investing

November 2019 • infrastructureinvestor.com

Tackling the ESG puzzle

Investing
in the future.

AVAIO is bridging the AVAIO has a clearly defined focus in the creation or expansion
of middle-market sustainable infrastructure. Our team has

infrastructure funding gap more than 150 years of aggregate experience investing and
creating infrastructure across AVAIO’s four core sectors of

by investing in the creation water, transportation, digital infrastructure, and energy.

of sustainable new water, Our strategic partnership with AECOM, one of the world’s
largest infrastructure engineering companies, provides

energy, transportation and

priority access to a unique flow of investment opportunities
and brings deep market-sector expertise and project

digital infrastructure in
management skills to everything we do. We are committed
to creating long-term assets that are both environmentally

North America and Europe.

sustainable and positively impact the communities in which
they are located.

To learn more about us, visit avaiocapital.com

 Contents

How to contact us

Senior Editor
Bruno Alves
[email protected], +44 20 7167 2031
Senior Special Projects Editor
Graeme Kerr
[email protected], +44 20 3862 7491
Sustainable investing
News Editor
Kalliope Gourntis
[email protected], ISSN 1759-9539 • NOVEMBER 2019
+30 6937 230 121
Senior Reporters
Zak Bentley
[email protected], +44 20 3862 7497
Jordan Stutts
[email protected], +1 646 214 4158 Insight ‘We evaluate the team’ AP6’s Anna
Follér on sharing best practice 37

2
Reporters
Eduard Fernández
Secure income and green infra are
[email protected], +852 6996 4355
Daniel Kemp compatible Debt provides secure and
[email protected], +61 452 300 346 Year in review ESG rises up the agenda sustainable income, writes Ostrum Asset
Contributors Management’s Céline Tercier 38
Amy Carroll, Rod James, Adam Le, Julia Lee, EDITOR’S LETTER The big questions that
Helen Lewer, James Linacre, Vicky Meek,
Carmela Mendoza, Ben Payton, Preeti Singh surround impact 4
The A-Z of Impact Investing
Managing Editor, Production: Mike Simlett
How impact investing is becoming
Head of Production: Greg Russell
Production Editors: Daniel Blackburn,
Adam Koppeser
Analysis an essential element of ESG
strategies 41
Copy Editor: Eric Fish
Head of Design: Miriam Vysna
Senior Designer: Lee Southey
6
Are ESG comparisons fair? Investors
Six trends shaping the sector 42

Designer: Denise Berjak Pathway to the next level

Marketing Solutions Manager:
need to look past tick-box credentials, Infrastructure is central to climate change
Hywel Grimmett says Aviva Investors’ Ian Berry mitigation and adaptation, writes
[email protected], +44 20 7566 5474
Gregory Smith of InstarAGF 45
Subscriptions and reprints GRESB data: The regional view 10
[email protected]
Hydropower
Customer Service Creating value through sustainability
[email protected] Aquila Capital’s Tor Syverud on the
Preserving resources is essential,
Editorial Director: Philip Borel sector’s significance 51
says Sam Lissner of Ridgewood
Director, Digital Product Development: Infrastructure 12
Amanda Janis ESG and SDGs
Director of Research and Analytics: Dan Gunner Meridiam’s Matthieu Muzumdar
Why investing in resilience is here to
Managing Director, Americas: Colm Gilmore and Ginette Borduas on integrating
stay Is there an opportunity to develop
Managing Director, Asia: Chris Petersen sustainability throughout the
funds dedicated to resilient investing? 16
Group Managing Director, Brands and Markets: investment process 58
Paul McLean Keep it clear Emma Howell of Hermes
Chief Executive: Tim McLoughlin A sustainable future
Infrastructure on the importance of
David Scaysbrook of Quinbrook
transparent ESG reporting 20
Infrastructure Partners on the impact of
GRESB data: how sectors compare 24 new asset creation 64

Partnership at heart of ESG Can Infra’s most important role

managers do more to help investors, asks The asset class is central to our planet’s
Vantage Infrastructure’s Valeria Rosati 26 wellbeing, writes AVAIO’s Mark
McComiskey 70
How the climate is changing
For subscription information visit David Russell of USS Investment Path to ESG Action-oriented engagement
infrastructureinvestor.com Management outlines his ESG and a flexible approach are key, say
priorities 30 Angela Roshier of DIF Capital Partners
and Alastair Scott of ERM 76
Powering the future Mikael Karlsson of
Actis on access to electricity 32 Last word ESG points of view 84

November 2019 • Sustainable Investing 1

 Sustainability stories The past year has seen more
managers focus on renewables as ESG rises up
the agenda

NOV 18 DEC 18 JAN 19 FEB MAR

Water and waste KKR, TPG, Partners

management top Group are first adopters
sustainable assets of IFC’s impact
wish list principles

Institutional investors that Investors have more clarity

responded to a Bright and consistency on what
Harbor Advisors survey are constitutes ‘impact investing’
most interested in water and after the International Finance
wastewater management Corporation unveiled its
when seeking exposure Operating Principles for
to sustainable alternative Impact Management. The
assets. The New York-based principles define impact
placement agent found 81 investment and outline
percent of LP respondents IFM tracks infrastructure carbon footprint as the essential features of
had already added a investors ‘demand’ action managing its funds. Nearly 60
sustainability, impact or ESG impact investors in the private
mandate to their investment IFM Investors published data on the carbon footprint of its equity industry with about
strategies. Two-thirds of infrastructure assets for the first time. Explaining the rationale $250 billion of assets, among
respondents said that behind the decision, the Melbourne-based firm’s executive them KKR, TPG, Actis and
measurement of impact director of responsible investment, Chris Newton, told Partners Group, have signed
was necessary to make Infrastructure Investor that investors were “demanding” that up to the principles.
sustainable investments. managers take climate-change considerations seriously: “It’s not
ideological for them – it’s purely driven by their view of risk and
view of opportunities.”

2 Infrastructure Investor • November 2019

Standardised data Three firms launch
the ‘holy grail’ of ESG renewables funds
investing
Three of infrastructure’s most
Fund managers need like- recognisable firms began
for-like information across raising funds that will focus
sectors and geographies exclusively on wind projects
when judging the impact of and solar farms. BlackRock
ESG investments, according is believed to have entered
to panellists at a sustainability the market for its third
webinar in May. Mercatus, renewables-only vehicle,
an alternative asset and La Banque Postale garners €365m at first close for while perennial II50 champion
investment management ‘responsible infra’ fund Macquarie launched a
platform, took a straw poll $1.5 billion fundraise under
of the audience. The survey La Banque Postale Asset Management held a €375 million first the banner of the Green
found that 87 percent of close on its new European Responsible Infrastructure debt fund, Investment Group. Stonepeak
respondents were at least as it seeks a total of €600 million. The vehicle will see LBPAM Infrastructure Partners is
thinking about implementing apply ESG screening processes to investments. Investments raising a renewables vehicle
ESG reporting into due have already been made in the energy transition and digital and is believed to be
diligence, if they had not infrastructure sectors. The fund also plans to invest in energy seeking up to $1.25 billion in
done so already. storage and electric vehicle charging infrastructure. commitments.

APR MAY JUN JUL AUG SEP

Aberdeen Standard to manage AIIB’s Refocus on governance in ESG, Meridiam embraces

$500m ESG infra bonds portfolio says S&P impact investing with
switch to Benefit
The Asian Infrastructure Investment Bank Standard and Poor’s launched an ESG Corporation
selected Aberdeen Standard Investments evaluation method to sit alongside its credit
as the manager for its $500 million AIIB Asia ratings service. The methodology, which Paris-based infrastructure
ESG Enhanced Credit Managed Portfolio. The evaluates an entity’s profile against ESG risks, fund manager Meridiam
portfolio aims to invest in infrastructure-related gives 30 percent weightings for environmental changed its by-laws
bonds and boost ESG investment across the and social factors, and 40 percent for to become a Benefit
region. The portfolio will mainly focus on governance. “We see governance having a Corporation, confirming its
dollar-denominated corporate bonds with an bigger impact towards the evaluation than the commitment to balancing
average rating of BB+. Thomas Walenta, senior other two components.” Mike Wilkins, head of profit with achieving positive
investment officer at AIIB, said the bank would sustainable finance at S&P, told Infrastructure impact. It is one of the first
be targeting returns of 5-7 percent. Investor. companies to do so in France,
a move made possible with
the passage of the Pacte
Act in May. The firm will be
creating a special committee
tasked with measuring the
impact of its investments.

November 2019 • Sustainable Investing 3

 Insight

Editor’s letter

The big questions that New York

130 West 42nd Street
Suite 450

surround impact
New York
NY 10036
T: +1 212 633 1919

London
100 Wood Street
London
EC2V 7AN
T: +44 20 7566 5444
Graeme Kerr Hong Kong
[email protected] 19F On Hing Building
1 On Hing Terrace Central
Hong Kong
T: +852 2153 3240

Infrastructure Investor

H
ow do you quantify impact? It’s a huge question and one that runs through our Published 10 times a year by
PEI Media. To find out more about
biggest-ever Sustainable Investing report. o say the issue – and specifically the PEI Media visit thisisPEI.com
impact of global warming – has risen up investors agenda in recent years would be
© PEI Media 2019
something of an understatement.
avid ussell, head of responsible investment at SS Investment anagement, the No statement in this magazine is to
investment arm of the s largest pension fund, recalls how years ago it was one of be construed as a recommendation
to buy or sell securities. Neither
the few investors raising climate issues with fund managers. Now the climate crisis is one this publication nor any part of it
of the hottest topics of conversations for may be reproduced or transmitted
in any form or by any means,
LPs. or managers, that raises uestions
of resilience. How do you adapt assets to
“ There’s a growing electronic or mechanical, including
photocopying, recording, or
cope with global warming How do you realisation that by any information storage or
retrieval system, without the prior
uantify the risk nd who should pay
One answer could be resilience
resilience adaptations permission of the publisher.
Whilst every effort has been
funds. rench fund manager eridiam don’t have to made to ensure its accuracy, the
publisher and contributors accept
announced in September that it no responsibility for the accuracy
was partnering with the ockefeller be prohibitively of the content in this magazine.
oundation to launch a fund dedicated Readers should also be aware

to urban resilience infrastructure. he

expensive ” that external contributors may
represent firms that may have
goal, the foundation says, is to create an an interest in companies and/or
their securities mentioned in their
industry standard for resilience infrastructure . contributions herein.
lthough others have yet to follow suit, they are considering the issue with respect
to their existing portfolios. Benchmarks are emerging and there is a growing realisation Cancellation policy You can
cancel your subscription at any
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Commission on Adaptation has said such investments have the highest payback ratio. of subscribing and you will
Impact is also the label given to one of the fastest growing investment movements of receive a refund of 70 percent
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their hype, but there s no uestion of the growing interest from infrastructure managers available. Any cancellation request
needs to be sent in writing to
wanting to show they are responding to climate change. the subscriptions departments
o delve deeper into what exactly impact investment involves I spent two days at the (subscriptionenquiries@peimedia.
Global Impact Investment Network s annual forum creating an of Impact Investing com) in either our London or
New York offices.
with artist Lee Playle based on delegates suggestions. he fact that the letter was
chosen to denote metrics signifies how the notion of uantifying impact is crucial to the Printed by Stephens & George Ltd
success of this burgeoning sector. urn to p. to see the results of our endeavours. stephensandgeorge.co.uk

Graeme Kerr

4 Infrastructure Investor • November 2019

Proven
sustainability
leadership
Creating value in European mid-market
infrastructure investments

Named by GRESB Named by GRESB 4 of 6 Arcus 2019 UNPRI Assessment BVCA* 2019
as the Global as European Fund Assets Achieved A+ in Strategy and Governance Responsible
Diversified Fund Sector Leader 5 Star Rating A in Infrastructure Investment Award
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 Analysis

K E Y N O T E I N T E R V I E W

Are ESG
comparisons fair?

Investors need to look past tick-box credentials to consider the real ESG impact
of their infrastructure projects, says Ian Berry, head of infrastructure
equity at Aviva Investors

Q What does sustainability mean

in the context of infrastructure
and why is it so important?
SPONSOR
AVIVA INVESTORS
tainability has to be called into uestion –
which then begs broader questions around
the level of growth in global trade, potential
ost LPs view infrastructure as a long term benefits of limiting the distances goods are
and low risk investment. hat is what they not an area where we invest, the investment transported, and so on.
are looking for from this asset class. But that rationale is typically predicated on an expan-
can only be achieved if there is a long term
approach to the underlying risks.
In its broadest form, sustainability simply
sion in global trade, with local factors over-
laid. But how much consideration do LPs
give to the fact that ports – especially when
Q What systems or processes
do you have in place to
ensure sustainability is core to your
means taking a long term view of the envi- including the emissions of the shipping traf- investment decision making?
ronmental, social and financial context in fic using their facilities – are some of the This is something we have been focused on
which your asset is operating. lthough own- most polluting assets in the world How for a very long time. We were a founder of
ing trophy assets has its attraction for some, much time is spent considering contingency the N supported Principles for espon-
investing in infrastructure isn’t about owning plans for rising sea levels sible Investment. Now, of course, almost
steel and concrete Longevity and predicta- here is a real risk that either these as- everyone is a signatory, so it isn t something
bility of outcomes is key and anything that sets are going to be worthless at some point that really stands out. But it has been in our
undermines that longevity and predictability or else you are going to have to pour a whole N for decades.
should be seen as a material risk. load more concrete to keep them above sea viva Investors, as a company, has a sub-
ake ports, for example. lthough it s level. With such examples, long term sus- stantial and high profile global responsible

6 Infrastructure Investor • November 2019

 Analysis

Sustainable investment in practice: energy from waste

In 2018, Aviva Investors’ managed funds We also focused on the source of fuel, preferring locally
invested in a UK energy-from-waste plant sourced waste , tonnes of refuse derived fuel
in Cheshire – Hooton Bio Power – which was each year for this asset alone, so the added emissions of
due to commence construction. But, while the transporting the refuse are minimal – and, given the
project appeared to be cut and dried from an location of the asset, potentially even lower than the
ESG perspective, reducing both landfill and CO² transportation emissions if the refuse was instead
emissions while creating local jobs, the situation transported to landfill.
proved not to be so straightforward. he social dimension was also an important
consideration. nalysis of ESG impact often focuses on
While the environmental case was strong on the surface, debate positive effects at a national and global level, but ignores
remains rife on the overall benefits of this technology. We had potential disruption of local communities, which need to
to evaluate a number of risks, including whether, as renewable be managed to enable the e cient construction and
technology develops at pace, energy from waste would one day long term operations of the facility. his facility is located
be viewed as negative compared to cleaner energy such as wind on an existing industrial site, away from the nearest
and solar. households, as well as from any area of special scientific
We have invested in other energy from waste assets interest, limiting any inconvenience such as the vehicle
previously and so were aware that scientific studies generally movements required for transporting of waste to the
support the ESG criteria of the sector – and we knew that facility.
choosing the right provider of technology is not only crucial from he facility is designed to meet or exceed all relevant
a simple risk perspective, but also from an ESG perspective. Our planning and environmental standards – indeed our
experts demonstrated that, despite emissions from burning waste approach elsewhere has been to upgrade existing assets to
to generate electricity, the plant would provide the e uivalent ensure our assets are at the forefront on such matters. The
of , tonnes of net annual CO savings compared with the plant has also created local obs and local businesses are
impact of sending the waste to landfill, through preventing the being offered a discount on the electricity produced.
aerobic breakdown of the waste while producing energy. nd so, while we did identify ESG risks with the
In addition, England s landfill sites are forecast to over ow by Hooton Bio Power investment, our analysis showed
, so there is a clear need for an alternative. he plant should that on balance it was net positive. he waste to energy
therefore be viewed as a waste treatment facility, rather than pro ect would promote sustainable growth at minimal
purely an energy provider. cost at both a national and local level.

investment team focused on implementing achieve what we want it to achieve, we will that would centre on whether that meant
ESG criteria, as well as being active in the vote accordingly. yield, or total return, or in ation linkage. In
market reform arena. Historically, this team he challenge now is to translate that terms of our infrastructure investing activity,
has concentrated primarily on li uid mar- extremely detailed, market leading level of we have always focused on assets that bene-
kets, be that fixed income or e uities. engagement into the real asset world. he fit wider society. Increasingly, however, LPs
We have always been a vocal investor on terminology we use to describe our ap- and the wider market are more focused on
these matters. If we believe a listed company proach to this is responsibility built in . how we incorporate responsible and sustain-
has fallen short of our standards, we will en- We are always focused on constructing able criteria as a critical component of the
gage with them. If that engagement doesn’t the right outcome for the client. In the past, outcome being targeted.

November 2019 • Sustainable Investing 7

 Analysis

Q And how are investors

approaching due diligence
around sustainability? What is it that
“There is still not
would cost money and reduce long term
performance.
he consensus now is that sustainable
they want to see? assets often achieve higher values and are
here is a significant desire for LPs to be
enough consistency exposed to lower levels of risk.
provided with information around ESG his is ust common sense an asset built
performance. he problem, however, is that
in the way that and operated with minimal impact will
investors don t always know the right ues- perform better in a world where sustaina-
tions to ask and, by inference, won t always
ESG performance bility is important to the users of the infra-
know when they get a good answer. structure.
It is not unusual to see ports and airports
is measured and nd, of course, particularly over the past
scoring better from an ESG perspective few years, knowing and delivering for your
than a renewables company. How can that
communicated” stakeholders has certainly proved critical.
be? hese days, the ability to mobilise public
or example, we have made significant opinion using social media means it is es-
investment in schools, health facilities, re- sential to get these things right.
newable energy, energy e ciency assets
and rural ultrafast fibre network rollouts.
Implicitly, these have a social benefit and
positive environmental impact.
Q How successful has the industry
been in terms of improving
sustainability and what are the big
We need standardisation so that there challenges ahead?
can be a true and fair comparison. Sustainability is now clearly at the top of
That is why we became a founder mem- the agenda as opposed to not being on the
ber of G ESB Infrastructure and are one of agenda at all. hat is undoubtedly a good
a small number of GPs that sit on the advi- thing. I would say the big challenge ahead,
sory board, trying to provide some real life however, is that infrastructure, as an in-
context to what G ESB Infrastructure is dustry, has not always been very good at
aiming to achieve – a holistic, peer to peer engaging with stakeholders – politicians
comparison of the ESG implications of in- and the end users of the infrastructure, the
frastructure investment. public.
even rarer that such analysis pre dates the There are various debates going on

Q So, how can standardisation be

achieved?
here is great work being done, but we are
current asset owners.
We are moving in the right direction but
there is still a long way to go. It is too easy
around the world right now, and specifi-
cally in the , about the relative merits
of public and private ownership. If it were
still some way off. Even measuring envi- for the big companies behind ma or trans- to come to power, the Labour party has
ronmental impact – where you might think port infrastructure or utilities, which dedi- explicitly said it believes government own-
metrics around carbon emissions, for exam- cate significant resources to ensuring they ership of infrastructure to be the correct
ple, provide some degree of standardisation, score well from an ESG perspective, to paint approach.
there is no fixed methodology across infra- an unrealistically rosy picture. hat idea has not been appropriately
structure assets for how that is calculated. t the other end of the scale, you have countered. arious efforts, including those
or example, most investors will report the types of assets we invest in, such as solar led by the Global Infrastructure Investor
on annual carbon emissions. However, you panels on social housing helping to eliminate ssociation, have tried hard to engage with
don t see any sort of balance sheet that fuel poverty and wind farms that contribute governments and other key stakeholders,
shows how much carbon has been sunk into to addressing local issues such as the upgrad- but the industry has not really been able to
the ground because a whole lot of concrete ing of neighbourhood facilities to running make the inroads required to ensure a fair
has been poured. Obviously, this should be educational visits for local school children. public debate on these matters.
a key metric for large assets such as airports, These companies don’t have the machinery We have a great story to tell in terms of
ports, toll roads, etc, but it is also relevant to continuously bang the ESG drum. It can environmental and social outcomes. nd, in
for all infrastructure assets – even renewa- be incredibly di cult for investors to distin- terms of governance, I think it is absolutely
ble energy assets – where steel and concrete guish between those two sets of messages. the case that private sector ownership deliv-
have to go into the ground to secure wind ers better results.
turbines in place.
Indeed, and especially true for renewa-
bles, upfront carbon impacts of constructing
Q Do you believe financial
performance and sustainable
investment practice are correlated?
Sustainable assets and a sustainable
economy are best supported by private
market tensions – a drive to always be bet-
new infrastructure often dwarf the emis- I think it is now broadly accepted that the ter.
sions from the lifetime of the asset. It is very two are aligned, but that was not always the hat is not always popular, particularly
rare to see a detailed environmental impact case. Even uite recently there would be in the current political environment, but it
analysis for the whole life of an asset – and arguments about whether being sustainable is our ob to get those messages out there. ■

8 Infrastructure Investor • November 2019

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 Analysis

GRESB data: The regional view

The 2019 survey had record participation rates, signifying the growing emphasis
infrastructure funds are placing on ESG

Assets in Oceania and that are globally diversified

scored highest in the 2019 regional asset assessment

42
100

50
100

$215bnEurope

$158bn
North America

55
Asset 100
scores out
of 100

$bn
$9bn
Gross asset value

Source: GRESB
Global

71
Average fund
48
Average asset score
107
Number of funds
393
Number of asset
assessment score participating, up from participants, up from
75 in 2018 280 in 2018

10 Infrastructure Investor • November 2019

 Analysis

The GRESB Asset Assessment is structured into seven sustainability aspects scored out of 100

42
Performance
11
Certifications
57
Management
49
Policy and
indicators and awards disclosure

$8bn Asia
100

42 50

20 18
20
19
100

17
20

53
100

Stakeholder Monitoring and environmental Risks and

$82bn
engagement management systems opportunities

Oceania 47 42 41
Participation rates are growing sharply

Number of fund participants Number of asset participants

120 400

300
80
200
40
100

0 0
2016 2017 2018 2019 2016 2017 2018 2019

November 2019 • Sustainable Investing 11

 Analysis

E X P E R T C O M M E N T A R Y

A commitment to preserving resources for future generations

is an essential part of any infrastructure investment,
believes Sam Lissner of Ridgewood Infrastructure

Creating value through

sustainable investments
In recent years, investor focus on sustaina- idgewood proactively focuses on op-
SPONSOR
bility factors has transitioned from excep- erationalising sustainability throughout our
RIDGEWOOD INFRASTRUCTURE
tion to the norm. Still, when making invest- investment process, from sourcing and dili-
ment decisions, many investors continue gence, to ownership and asset management.
to wrestle with how to effectively evaluate, In this endeavour, idgewood has defined a
implement and measure the sustainability of Promote biodiversity set of sustainability goals and developed a
and environmental
their investments. wellness proprietary framework for evaluating and
VALUE FOR INVESTORS

idgewood believes investing in line managing investments along its axes of val-
with our values enhances the value we create ue(s).
Ensure
for our investors. In the near term, sustain- access to Our investment in the ista idge Wa-
able investments create e ciencies that re- affordable, ter Supply Pro ect exemplifies idgewood s
reliable
duce costs, improve service levels and drive infrastructure Make philosophy of investing and emphasis on
greater profitability. Over the longer term, communities sustainability.
resilient
we expect sustainable infrastructure will ista idge stewards sustainable man-
prove robust to a range of social, environ- agement of natural resources protects envi-
Steward
mental and other changes, making our in- scarce ronmental wellbeing and ensures access to
vestments ever-more attractive as investors resources affordable, reliable, and high uality servic-
and other stakeholders increasingly focus on es that make the community it serves more
the benefits of sustainable investing. ALIGNS WITH OUR VALUES resilient to a range of potential disruptions.

12 Infrastructure Investor • November 2019

 Analysis

Ensuring reliable, plentiful and

clean water for San Antonio
Vista Ridge is Ridgewood’s investment
to construct, own and operate a mile
km pipeline that will supply approx-
imately percent of San ntonio s fresh
water under a year take or pay contract
with the investment grade San ntonio
Water System.
ounded in , San ntonio, exas is
among the most dynamic cities in America. STARTING POINT
Over the past several decades, an in ux of
high tech and industrial companies has con-
tributed to rapid expansion of San ntonio s
metropolitan area, which is today among
the fastest growing urban regions in the
country. With a population of more than ENDING POINT
. million people, San ntonio is currently
the seventh largest city in the S. Looking
ahead, city o cials forecast a near doubling
of the city s population – to almost three
million people – over the next two decades.
Despite being prone to severe drought
conditions, San ntonio has ourished San Antonio
thanks to its proximity to the Edwards aq-
uifer, which is a substantial underground
resource from which the city draws most of
its fresh water. s the population increased,
San ntonio ramped up withdrawals from
the a uifer. But, over time, the Edwards has
struggled to meet burgeoning demand and
sustained significant ecological damage.
ista idge re ects idgewood s ap-
proach to investing in essential infrastruc-
ture that is of strategic, environmental, and
social importance to the communities it
serves.
he public private partnership creates a Vista Ridge
new mile link for San ntonio to one of
merica s most prolific a uifers the Carri- fer is considered to be drought resistant and de-stress these habitats and encourage eco-
o Wilcox. ista idge diversifies the city s contains over times the amount of water logical healing and re uvenation.
water supply, it provides meaningful relief to in all exas lakes combined. In addition to these environmental
the ecology of the Edwards a uifer, and it Ridgewood is committed to promoting considerations, we are also committed to
ensures the citi ens of San ntonio will have biodiversity and environmental wellness. effecting positive social impact and ethical
access to reliable, plentiful and clean water By helping to reduce San ntonio s overuse governance that ensures access to critical re-
for generations to come. and over reliance on a single a uifer, ista sources and services that make communities
idge can help begin the process of repair- more resilient.
Stewarding scarcity ing serious ecological damage that has been Ridgewood invested in Vista Ridge at the
Ridgewood is committed to stewarding done to the Edwards. beginning of construction in , which
scarce resources for the benefit of future In the mid s, scientists from the was after the completion of a multi year
generations. In each of our investments, Geological Society of merica catalogued procurement and permitting phase dur-
idgewood focuses on facilitating sustain- more than a uatic and subterranean spe- ing which pro ect participants progressed
able and e cient operations. In our ista cies living in the Edwards a uifer ecosys- through a public comment period.
idge investment, the community deter- tem. In the intervening years, increased wa- he agreed upon concession ultimately
mined that the Carri o Wilcox a uifer ter usage by San ntonio contributed to the directs idgewood and its partners to build,
– which spans more than million sur- endangering of roughly percent of these own and operate ista idge for years,
face acres – is an appropriate supplemental species. By creating access to a new source after which ownership of the pro ect tran-
source of water for San ntonio. he a ui- of water for San ntonio, ista idge will sitions to the city. During the concession

November 2019 • Sustainable Investing 13

 Analysis

A sustainable approach for water

As a signatory to the UN- often ac uires water utilities from real
supported Principles for estate developers and family owners that
Responsible Investment and have under-managed their operations
contributor to the GRESB and capital investment. Importantly,
network, Ridgewood takes ndine standardises and professionalises
seriously its responsibility Undine upgrades the management of
the management of the water and waste
to report on sustainability fresh water and wastewater utilities in water systems it ac uires, investing capital
initiatives and performance. the communities it serves to improve the utilities operations and
customer service levels.
Drawing from important work by the 300+ million gallons of Working with management,
clean water provided via
Sustainability ccounting Standards idgewood developed a set of
upgraded systems
Board and other institutions focused on sustainability focused PI metrics to track
ensuring consistent and high uality our collective success in execution. Some
reporting across the industry, idgewood illustrative examples include that, to date,
has developed a proprietary matrix of we have delivered more than million
sustainability metrics, which we report to leaks more efficient gallons of fresh water through upgraded
LPs on a uarterly basis. repaired pump houses infrastructure. nder idgewood s
installed
idgewood s investment in ndine ownership, ndine has fixed nearly
Group is focused on building a mid leaks, and it has installed more than
si ed regulated water utility through the new state-of-the-art pump houses and
ac uisition of independent regulated water storage tanks. hrough these efforts,
and wastewater utility systems in the highly new storage new hydro- ndine is reducing water line losses and
tanks built to pneumatic
fragmented S lower middle water market. improve service pressure tanks ensuring more sustainable, e cient water
In executing this strategy, ndine installed resource management practices.

period, the municipal water authority of various stakeholders. In recognition of its regional water associations for safe and
the city of San ntonio has agreed to the focus on sustainability throughout design sustainable operations.
contracted price it will pay ista idge for and execution, Garney has been ranked as Collectively, these efforts by idgewood
water. hrough this structure, the city was one of the top environmental contractors in will create an essential piece of environmen-
able to amortise the large, upfront cost as- America. tally and socially beneficial infrastructure,
sociated with a pro ect of this scale over a hrough the ownership phase, idge- governed by a transparent public private
multi decade period. wood remains committed to ensuring its partnership framework. ista idge will
Ridgewood is committed to forging investments achieve sustainability goals and diversify the city s supply of water, thereby
partnerships with communities and stake- maintain a tra ectory of continued excel- safeguarding the resources of its existing pri-
holders that share its values. In the case lence and improvement. mary aquifer and supporting the continued
of ista idge, idgewood s sustainability In selecting an operator for ista idge, development and growth of San ntonio.
commitments and uni ue relationships led idgewood utilised its deep network of re- oo often, sustainable investing is little
to collaborations with leading, like minded lationships throughout the water industry more than a marketing bu word, with min-
pro ect partners that will steward the as- to lead a competitive, targeted process that imal integration into managers investment
set and resources for generations to come. resulted in the selection of EPCO tili- processes and decision making. We funda-
hrough these partnerships, idgewood is ties as the utility company responsible for mentally believe that investing according to
working to ensure the operations and man- running day-to-day operations and com- sustainability values will also create signifi-
agement of this essential piece of San nto- pleting ongoing maintenance of the pro ect. cant value for our investors. ar from a forced
nio s infrastructure will be maintained to a EPCO operates more than , miles of choice between the two, our framework en-
standard of excellence. water transmission line in North merica, sures the environmental and social impact of
o complete the construction phase of including a water pipeline serving commu- our investments enhances returns. ■
the ista idge pro ect, idgewood part- nities in nearby ustin, exas.
nered with Garney Construction, which is EPCO s strong history of sustainability Ridgewood Infrastructure invests in essential
merica s leading water pipeline construc- operations was of key importance to infrastructure in the US lower mid-market. It is
part of the affiliated Ridgewood companies,
tion firm. Ridgewood. EPCOR has been recognised
which manage more than $7 billion of capital
Garney has deep experience working in as a top company promoting sustainability and commitments focused on investments in
and around the city of San ntonio. he minded business models that incorporate infrastructure and energy. As an organisation,
we are committed to safeguarding scarce
company has deep relationships in the social and ecological impacts. It has also resources, while also promoting social
community and is sensitive to the needs of been recognised by multiple state and progress and ethical governance

14 Infrastructure Investor • November 2019

 INVESTING
IN AND FOR A
SUSTAINABLE
FUTURE

Ridgewood invests in Ridgewood Infrastructure considers

environmental, social, and governance
essential infrastructure in factors to be important sources of value
the U.S. lower-middle market. creation and believes that well-governed
We utilize our deep experience and companies with an environmentally
sustainable and socially responsible
broad relationships to collaborate way of operating deliver better
with management and drive value. outcomes for stakeholders.

www.ridgewoodinfrastructure.com
 Analysis

Why investing in resilience

is here to stay
Real assets including infrastructure are particularly
exposed to climate change. What can investors do
to mitigate the risk? And is there an opportunity to
develop funds and platforms dedicated to resilient
investing? Daniel Kemp finds out

O
f all the risks to keep rench infrastructure fund manager erid-
LPs awake at night, iam, which announced in September that it
how to adapt to a was partnering with the ockefeller oun-
changing climate is dation to launch a new fund dedicated to
uickly moving up the urban resilience infrastructure.
list. he vehicle will target million,
Climate resilience is one of the hottest investing in both developed and emerging
topics of conversation for our LPs, says markets and across sectors – a broad remit
IC partner Leisel oorhead, who is re- as long as investments meet the criteria of
sponsible for managing ESG concerns for improving urban resilience.
the Brisbane head uartered fund manager s In a blog post, the ockefeller ounda-
infrastructure assets. I ve noticed a rapid tion said the goal was to create an industry
increase in focus from them around how standard for resilience infrastructure, and
prepared our assets are for climate change. specifically in regard to those assets that are
In fact, she says, it represents one of the built to improve daily life, ensure survival
most pressing risks investors and asset own- and support continued growth in the face of
ers are grappling with. increasingly ha ardous climate events .
hat should come as no surprise. fter It is an undoubtedly bold move. l-
all, global warming continues to dominate though the vehicle will be a niche product
the headlines – whether it s Swedish teen- for now, it is one of the first instances in
ager Greta hunberg s campaigning at the which a fund s strategy has revolved solely
N or Extinction ebellion protests bring- around the theme of resilience, rather than
ing central London to a halt. Little wonder, taking a more generalist approach.
then, that LPs should have the issue at the Emma Herd, chief executive of the In-
front of their minds. vestor Group on Climate Change, an or-
ganisation bringing together like minded
Resilient strategy investors in ustralia and New ealand,
But uantifying the risk and putting a num- has so far seen more focus on the latter ap-
ber on it has proved di cult, with little in proach from her members.
the way of benchmarking to assess how re- When we looked at the issue of how to
silient assets are in comparison with others. get more capital into climate adaptation, we
How big is the challenge nd might found that to make it stack up from a finan-
it even present an opportunity for inves- cial perspective you needed to have an inte-
tors One firm that certainly thinks cli- grated approach to funding, she says.
mate change could present opportunities is It s very hard to generate a return off

16 Infrastructure Investor • November 2019

 Analysis

November 2019 • Sustainable Investing 17

Analysis

a seawall, for example. But you can protect ing the impact of global warming during the
return through measures you undertake preliminary design stage was negligible .
around a port or an airport. It’s quite hard “Climate resilience is he case study also found that the addition-
to separate out what is a straight adaptation al outlay of funds during construction was
measure, so we re tending to see integrated one of the hottest topics outweighed by the confidence that all fu-
climate funds that do both – reducing emis- ture climate change impacts have been con-
sions and increasing resilience on the way of conversation for our sidered and there will be no need to upgrade
through, for example. the runway for some time .
hat s not to say there isn t a lot of LPs” I s Leslie says that resilience en-
thinking going on about how to create a hancements do not necessarily need to be
resilience fund. here are lots of conversa- capital intensive.
tions around how to make this work, but the LEISEL MOORHEAD or example, we can implement op-
QIC
uestion is how do you do it and still gener- erational changes that use data, forecast-
ate private sector level returns ing capacity and technology to predict and
Chris Leslie, a senior managing direc- respond to climate change impacts with
tor for ac uarie Infrastructure and eal improved management protocols he says.
ssets based in New ork, says that ood he N Global Commission on dapta-
barriers or levees, which he characterises as tion report demonstrated that these invest-
resilience as a service , could be a category ments have the highest payback ratio.
for investment in future. But firmly uantifying the precise num-
here are fewer of these investment bers is still not easy, despite awareness of the
opportunities in existence and they require issue, having grown significantly in recent
innovative financing solutions, but they are years. Efforts are underway to produce in-
likely to be increasingly re uired, he says. dustry benchmarking systems, with Natixis
We are evaluating these opportunities as and E HECinfra recently announcing a re-
part of our broader investment mandate. search programme into an ESG index that
would include climate resilience. et the
Making trade-offs issue remains highly complex.
t IC, oorhead says the need to balance s IGCC put it in a report on us-
the investment decisions of today with the tralian assets o date, no comprehensive
potential impact that a future climate may estimates seem to exist on the cost of climate
have on an asset is the ma or challenge. change impacts in ustralia and the likely
If you re designing and building some- level of investment re uired for adaptation
thing new, it s much easier to take account measures.
of adaptation costs in that design process, so his makes cost benefit analysis of cli-
it s probably the easiest and most cost effec- mate change adaptation at an aggregated
tive way to achieve low vulnerability, she level impossible to uantify.
says.
But on existing assets, you re weighing
up the cost of prevention now versus what Transitional risks
you expect to be higher reactive adapta- dding to the complexity is the fact that no
tion costs in the future. here s always that two assets are ever the same.
trade off what s the most effective, e cient oorhead says that a ma or challenge
and e uitable way of investing for resil- approximately . metres higher than was when assessing climate resilience in a port-
ience? Is it the customers today who pay the re uired by regulation to mitigate the risk. folio is the fact that infrastructure assets are
cost or is it shared among the customers of ou can do all the climate modelling in heterogeneous by their nature.
the future hese are real life conversations the world, but the team still had to take a Some are new, some are old, they re
that happen at the moment. decision to incur that extra cost to raise the built with different materials, and some have
By way of example, oorhead points to level of the runway, oorhead says. hat interdependencies with other networks, he
the development of the new parallel runway decision, while there s a higher upfront cost, says. here s definitely no one si e fits
at Brisbane irport, in which IC holds a improves longer term resilience and is more all .
percent stake on behalf of its clients. cost effective. When you re building a run- ichael Cummings, head of P Cap-
he airport s owners were building a way, you don t really get the option to raise ital s ustralia and New ealand infrastruc-
new runway on the site, which is in a low ly- its height in years time. hat would be ture funds, echoes this. He says that when
ing coastal area, one that is already sub ect cost prohibitive, so you have to make that it comes to the risk of physical damage to
to potential storm surges and is exposed to trade off. assets, it depends enormously on the type of
a rise in sea levels in the future. In the end, n ustralian government case study on asset and where in the world it is located, as
the decision was made to build the runway the pro ect found that the cost of consider- risks are uite specific to the climate in each

18 Infrastructure Investor • November 2019

 Analysis

region. n electricity distribution network While we look at it from a portfolio

in ustralia is susceptible to an increase in point of view, we are a much more active
bushfires caused by extreme temperatures investor in the assets themselves, says
and drought, for example, while a compara- Cummings. ather than trying to have an
ble asset in New ealand must contend with average across a fund manager portfolio,
the threat of extreme storms instead. you need to get into the detail of each asset,
But Cummings points out that there is and in each geography. That’s why we take
another way to consider climate change risk. active board positions and ideally ma ority
his stems from potential reductions in de- control in assets .
mand for assets if consumer appetite chang- It s also increasingly clear that resilience
es, or increased costs if regulation tightens. is an important part of protecting an asset’s
He calls these transitional risks. value when the time comes to sell.
his could be whether there is an on- We recently sold a business that had
going impact on ights, for example, from undergone several resilience upgrades
consumer choices that deem ying to not be which had improved its sustainability as a
a good climate option, through to electrici- business, says Leslie. his proved to be
ty, with people sourcing their own through highly valuable to potential buyers during
use of solar, he says. that sales process.
y point of view on airports, for ex-
ample, is that I think the airlines and the ‘Work in progress’
makers of the airplanes are well on to that, P Capital, I and IC do not have
and what you ll see is continuing e ciency plans to follow eridiam in producing a spe-
driven through new engines, he says, with cific climate resilience focused fund. How-
benefits for consumers and the environment ever, it s clear that all of them, along with
coming as a result of that focus. most other responsible investors, are already
he point is that fund managers should considering this issue with respect to their ex-
be aware of these secondary risks too, and isting fund portfolios and how it could affect
that the risks will differ hugely from asset to returns.
asset. Overall, I think investors are looking for
resilient infrastructure, and resilience around
climate change and risk management being
integrated into an overall investment, rather
The tricky task of benchmarking than on niche products like eridiam and
ockefeller s fund , Cummings says. hat
“We’re seeing benchmarks come through really quickly,” says fund has its place in the market, don t get me
Emma Herd, chief executive of the Investor Group on Climate wrong – but mainstream infrastructure in-
Change. “When we first looked at this a few years ago, there was vestors will still be making sure that they re
nothing, and there was a very strong focus on transition risk. choosing managers that have got robust pro-
cesses in place from origination through to
Now we re beginning to see portfolio level approaches emerging, with new service asset management and exit.
providers looking to take the science and integrate it into financial assessment and Herd describes efforts to produce specific
build it up into some sort of benchmark that can be used on an ongoing basis. resilience strategies, and to better uantify
Natixis and E HECinfra recently announced new research into developing an the benefits of mitigation and adaptation, as
ESG index for infrastructure that would include climate resilience. G ESB already a work in progress . But progress is being
publishes an ESG benchmark. made. We ve done the work on avoiding
he edition of G ESB s benchmark saw infrastructure funds participate emissions as a fairly standard benchmark in
in resilience reporting for the first time. his was alongside reporting on individual terms of the environmental benefits, she
assets, with a percent uptick in the number of assets taking part. says. But on the adaptation side we don t
G ESB said this showed an increasing awareness of the need to respond to have an e uivalent resilience rating or met-
investor attention on climate risks and resilience . ric that you can use in a standardised way to
he research found that funds and assets scored well on senior employee show that there is benefit to be had in in-
responsibility, communication with governance bodies and implementing business creasing investment in adaptation pro ects.
strategies, with more than percent of respondents in each case responding In the recent past, she says, there was
positively to those metrics. However, the results showed there was still room for nothing there. But now, with the launch of
improvement in other areas, with less than percent of funds setting specific funds like eridiam s and ockefeller s, and
climate resilience or risk targets and under percent measuring their resilience the development of benchmarks like Natixis s
related performance and outcomes. and E HECinfra s, the issue is rising up the
agenda. ■

November 2019 • Sustainable Investing 19

 Analysis

K E Y N O T E I N T E R V I E W

You can’t manage what

you can’t measure

Emma Howell of Hermes Infrastructure discusses the critical

importance of transparent ESG reporting

Q What are your views on

the correlation between
responsible investment practices and
SPONSOR
HERMES INFRASTRUCTURE
try, with clear and immediate benefits. In our
portfolio, this has led to a change in energy
mix and consumption patterns and improved
long-term stakeholder value? waste optimisation strategies, benefiting the
responsible investment approach is essen- on governance, because we really believe environment and cutting costs.
tial to delivering sustainable, risk ad usted having a robust governance framework bet- here is, however, still a lot to do on the
outperformance over the long term. Our par- ter e uips a company to positively address social aspects of ESG. Issues can be uite
ent institution s ESG heritage dates back to its environmental and social responsibilities. localised, making it more challenging to
the early s, with a demonstrable record s an infrastructure manager, we have a very develop a common language around how
in responsibility and a pioneering engage- clear responsibility to our investors, to so- best to bring these considerations togeth-
ment service. Since Hermes Infrastructure s ciety and to the businesses we invest in, to er beyond simple compliance with health
establishment in , we have continued to ensure that these issues are addressed in a and safety or other legal and regulatory re-
build on these strong foundations. sustainable way. uirements. In our portfolio, we have been
he public service nature of infrastruc- active in promoting diversity and inclusion
ture assets demands the highest standards of
ESG are adhered to. he long term nature
of the assets, the wide range of stakeholders
Q Is sustainable infrastructure
investment primarily about
tackling climate change?
and looked to expand the more traditional
definitions of health and safety by review-
ing mental health processes and practices in
involved, including large workforces, as well Over the past few years, the ESG debate each of our investee businesses.
as the interaction with the natural environ- has been somewhat redirected towards the
ment, all mean that a portfolio company s
approach to tackling ESG matters will im-
pact the prospects and long term value of
climate change crisis. While this has risked
lowering the priority of other aspects of
ESG, it has actually led to several concrete,
Q Who, or what, is driving
infrastructure’s increased focus
on sustainable investment and ESG in
that business. We place a strong emphasis easy to implement actions across the indus- particular?

20 Infrastructure Investor • November 2019

 Analysis

Over the past decade, we have witnessed evidence of integration in our processes, everyone s priority list as well as increased
a step change in the industry’s approach thought leadership, active engagement lead- disclosure re uirements and growing im-
towards ESG. here has been a tectonic ing to improved performance and transpar- portance being placed on ESG benchmark-
shift in societal attitudes and increasing ev- ent reporting of outcomes. Investors have ing and validation tools.
idence-based recognition of the impacts of now gone way beyond a simple box ticking
climate change have brought responsibility
and sustainability very much into the main-
stream. With an increasing number of mil-
exercise, driven by a genuine passion for sus-
tainability considerations. Sustainability now
needs to be part of a manager s N . In fact,
Q What tools are available and
what level of standardisation is
realistically achievable?
lennials entering the workforce and investor we believe that sustainability will ultimately here is no shortage of ESG frameworks to
universe, greater importance is also being become as important as financial returns in choose from. In fact, the problem is more
ascribed to making a positive contribution driving LP allocations. deciding which one to adopt. s well as the
to society through the workplace. Political nited Nations backed Principles for e-
and regulatory scrutiny has also reinforced
the link between ESG practices and invest-
ment performance, while legal changes have
Q What changes have you seen in
terms of ESG reporting?
he tracking of ESG metrics has moved
sponsible Investment, there is the Global
eporting Initiative, the Sustainability c-
counting Standards Board and the Glob-
also had an impact for instance, the re uire- away from a pure monitoring approach to al eal Estate Sustainability Benchmark,
ment for public pension scheme trustees to becoming a key feature of strategic and oper- among others.
consider financially material environmental, ational company decision making. Over the any companies also report against
social and governance matters, including cli- years, we have observed an increase in the the N s Sustainable evelopment Goals,
mate change, as part of their fiduciary duties. breadth, depth and uality of ESG report- while others report based on industry man-
With the increased importance attached to ing, as well as increased focus on uantita- dated standards. The irony is that most of
ESG, LP sophistication has grown and we tive, rather than ust ualitative, information. these frameworks are trying to address the
find that LPs are now driving an agenda that We believe you can t manage what you same need for harmonisation, but the indus-
was previously more manager led. can t measure, so we have encouraged our try has yet to reach an agreement on which
portfolio companies to invest in resourc- one everybody should use.

Q How does that manifest itself

in terms of how LPs approach
due diligence in this area? What
es to focus more on measurement of ESG
metrics, which has enhanced the uality and
consistency of reporting. Several of our in-
he push for standardisation is also
hindered by the challenges of a highly frag-
mented asset class. he informativeness of
questions are they asking? vestee companies are now publishing their fund level reporting is somewhat diluted by
Investor attitudes towards ESG have defi- own annual sustainability reports. sector specific nuances, which mean ESG
nitely evolved, consistent with society s his evolution has been driven by more considerations that are extremely relevant
increasing sophistication towards sustaina- active engagement from LPs and asset man- to one asset, are not as relevant to another.
bility practices. Investors want to see more agers as ESG has risen to the top tier of Where there has been success in creating

“Increasing evidence-
based recognition
of the impacts of
climate change have
brought responsibility
and sustainability
very much into the
mainstream”

Highly rated: Barry Solar Farm generates clean energy for portfolio investment Associated British
Ports which ranked first out of six global port companies in the 2019 GRESB assessment

November 2019 • Sustainable Investing 21

 Analysis

standardisation is in a common understand-

ing of an ESG value set, with responsibili-
ty and sustainability principles now being
broadly aligned. he P I has played an in-
Q How would you characterise your approach to ESG?
t Hermes Infrastructure, we have carefully assembled a team where all
members embrace the societal and environmental impact of infrastructure and
strumental role in this process. he harmo- contribute to a culture where sustainability is front and centre of everything we
nisation of reporting frameworks is the next do. ESG is deeply embedded in our strategy and fully integrated in our processes
step on this ourney and is critical to being throughout the investment lifecycle. s part of our reporting toolkit we undertake
able to effectively and ob ectively bench- several important initiatives including N P I, G ESB, portfolio company
mark performance and driving continuous engagement and PI monitoring. dditionally, this year we will launch our
improvement. inaugural esponsible Investment report.

Q What other challenges, beyond

standardisation, remain in
place regarding the measuring and
reporting of ESG performance?
esourcing can be a challenge. Companies
may not have the capacity or the budget to
dedicate resources to ESG reporting, which
can be uite onerous. In addition, robust
ESG data is, in many cases, only available
annually, making it challenging to report on
progress more fre uently.
Culture and context also play a role.
here will inevitably be differences in the
way companies and investors approach
ESG. Some may be country specific certain
urisdictions seem to place less relevance on
ESG factors than others. Company and sec-
tor specific factors also add complexity. or
example, a regulated company is already re-
uired to publicly disclose a range of ESG
data. hese challenges show that the in-
frastructure industry is on a ourney when
it comes to implementing and reporting on
ESG practices. s a manager, our role is to
continue making meaningful contributions
to industry wide initiatives such as G ESB
and the P I, whilst also actively engaging ESG considerations and, most importantly,
with our portfolio companies. the desire for substantive action.
“We believe that his is most visible in the uest for ESG

Q How far has the industry come

in terms of improving its ESG or
sustainability credentials?
sustainability will measurement and reporting, which initia-
tives such as the P I and G ESB have pos-
itively contributed to. t portfolio company
Compared with years ago, ESG is now
ultimately become as level, those frameworks are useful for driv-
a two way conversation, front and centre of ing change and identifying areas for year-
our interactions with investors, co share-
important as financial on-year improvement.
holders and portfolio companies. he focus Whilst we are pleased at how far the in-
is as much on concrete, measurable, short
returns in driving dustry has come, there is a long road ahead.
term actions as it is on longer term goals. We see two short term priorities. irst, in-
his has driven a refinement of in-
LP allocations” vestors and fund managers must engage to
vestment strategies and risk management define a common coding system to standard-
frameworks, as well as changes to re- ise reporting, recognising the collective ad-
cruitment practice and team composition vantage that would drive. Second, we should
amongst many managers and companies. expand the ESG conversation beyond the
he ongoing legitimacy debate around pri- realm of holistic risk management systems
vate investment in public infrastructure, and to grasping more of the opportunities which
the re uirement for a social licence to oper- will inevitably foster financial innovation and
ate has further reinforced a commitment to new products coming to market. ■

22 Infrastructure Investor • November 2019

 Our objective is to
deliver repeatable,
sustainable investment
performance for the
benefit of our clients,
responsibly

We specialise in direct equity

investments, creating diversified
portfolios of leading infrastructure
businesses seeking to deliver attractive
risk adjusted returns for our clients.

Our team of investment professionals

has raised and manages over £4bn*
of capital across co-mingled funds,
co-investments and managed accounts.

Learn more at:

www.hermesgpeinfrastructure.com

*NAV as at 30 June 2019

For professional investors only. This document does not constitute a solicitation or offer to any person to buy or sell any related securities,
financial instruments or products; nor does it constitute an offer to purchase securities to any person in the United States or to any US Person
as such term is defined under the US Securities Exchange Act of 1933. It pays no regard to an individual’s investment objectives or financial
needs of any recipient. No action should be taken or omitted to be taken based on this document. Tax treatment depends on personal
circumstances and may change. This document is not advice on legal, taxation or investment matters so investors must rely on their own
examination of such matters or seek advice. Before making any investment (new or continuous), please consult a professional and/or
investment adviser as to its suitability. All figures, unless otherwise indicated, are sourced from Hermes GPE LLP (‘Hermes GPE’) trading as
Hermes Infrastructure. For more information please read any relevant Offering Documents or contact Hermes Infrastructure.
The value of investments and income from them may go down as well as up, and you may not get back the original amount
invested. Any investments overseas may be affected by currency exchange rates. Past performance is not a reliable indicator of
future results and targets are not guaranteed.
Hermes GPE is a joint venture between Hermes Fund Managers Limited, GPE Partner Limited and HGPE Capital Limited.
Issued and approved by Hermes GPE which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor,
150 Cheapside, London EC2V 6ET. Hermes GPE is a registered investment adviser with the United States Securities and Exchange Commission.
Hermes GPE (Singapore) Pte Ltd is regulated by the Monetary Authority of Singapore. Telephone calls will be recorded for training and
monitoring purposes.
 Analysis

GRESB data: How the

sectors compare
Funds are making more Utilities have the highest average GRESB asset score by sector, while the performance of the
energy sector is declining

commitments to ESG, Transport Power generation excluding renewables

but progress in
implementing standards
is uneven across sectors
47 47
100 100

G
ESB s infrastructure assess- Network utilities Environmental services
ment throws up some interesting

63 49
results.
Some funds answered uestions on
how they integrate environmental, social
and governance analysis into their process-
es. hese responses have been used to calcu- 100 100
late scores for both funds and assets.
unds are making solid progress in most
areas towards improving their G ESB
Energy and water resources Social infrastructure
scores. lmost all now have senior deci-
sion makers accountable for ESG issues,
along with policies setting out their ap-
proach to ESG.
he data also show that assets vary dras-
53 29
tically by sector in how they integrate ESG. 100 100
tilities, energy and power generation are
performing relatively well, but social infra-
structure is languishing far behind, re ect- Diversified Data infrastructure
ing the need for greater priority to be given

53 52
to ESG factors.
eanwhile, G ESB has launched a
new module measuring resilience. unds
are generally at an early stage of integrat-
ing resilience into decision making. l- 100 100
though almost all have an accountable
decision maker, very few have set specific
climate resilience goals. ■ Renewable power generation Other

48 37
Asset scores
100 100
out of 100

24 Infrastructure Investor • November 2019

 Analysis

GRESB’s fund assessment shows nearly all funds have a senior manager responsible for ESG

92%
issues, but fewer are commissioning third-party reviews of ESG disclosures
2019 2018
0 20 40 60 80 100

Senior decision-maker
accountable for ESG issues Funds with a policy on
ESG issues
Policy on ESG issues

Individual(s) responsible for ESG

79%
issues

ESG risks and/or opportunities in

investment processes

Monitoring ESG-related
misconduct, penalties, incidents
and accidents Funds committed to becoming
a PRI signatory
Monitoring ESG management
and performance for its assets

Sustainable investment strategy

75%
Disclosure of ESG actions and/or
performance

ESG performance targets*

Funds with ESG screening strategies

ESG risks and/or opportunities in
investment monitoring processes based on exclusion

Commitment to ESG standards or

principles

Third-party review of ESG

22%
disclosure

* no figure for 2018

Funds are building resilience into risk-management processes, but few have climate risk targets
and monitoring of outcomes remains limited Management posts held by women
in the infrastructure sector
Fund rating Asset rating
0 20 40 60 80 100

Senior employee responsible for

resilience issues

98%
Systematic process for
communication with most senior
governance body
Implementation of resilience-
related business strategies over
the last four years Funds with a senior decision-maker
responsible for ESG
Systematic process to assess
social risks

Systematic process to assess

77%
physical environment risks

Systematic process to assess

climate-related transition risk

Measurement of resilience-
related performance and Funds with a sustainable
outcomes investment strategy
Specific climate risk and resilience
targets or goals

November 2019 • Sustainable Investing 25

 Analysis

E X P E R T C O M M E N T A R Y

With its increase in prominence, ESG integration in pension schemes’

investment strategies and practices is also facing growing complexity. Are managers
doing enough to help, asks Valeria Rosati, a senior partner at Vantage Infrastructure

The partnership at the heart

of ESG
Within Europe, there are a multitude of we can assist through active engagement at
SPONSOR
national investment regulations on ESG, each stage.
VANTAGE INFRASTRUCTURE
climate change, stewardship policies and
disclosure, in addition to the E direc- Looking for tailored solutions
tives on risk control and shareholder rights. hese beliefs are also shared across the he first stage in an investor s ESG inte-
Both the European Commission s action globe by other investors who have voluntar- gration is a milestone that many pension
plan on sustainable finance and the ily chosen to adopt responsible investment schemes have already reached the set up
Government s Green inance askforce are policies and to integrate ESG considera- phase. he investor establishes an ESG ap-
seeking to encourage ESG efforts across tions into their strategies. proach through policies and weaves it into
the wider financial markets. t the heart of Infrastructure is particularly well placed its investment strategy through asset alloca-
these regulatory and legislative changes lie to help pension funds and insurers achieve tions. Review of framework documents and
two beliefs these ob ectives, given its essential nature staff training may be needed to keep abreast
• In order to promote a scheme’s purpose and social function. of regulatory developments.
of growing and protecting members’ antage believes that infrastructure survey by Slacker Partners in-
capital sustainably, ESG factors need to managers should work in partnership with dicated that a top three obstacle to pension
be considered; and their clients on these issues. s solution ori- schemes implementation of ESG policies
• The investor community and broader entated infrastructure specialists, we have was the lack of products in the marketplace.
financial markets can drive positive soci- considered our clients own ourneys into llocating capital to unlisted infrastructure
etal impacts. ESG integration and monitoring and how debt or e uity can assist. he longevity of

26 Infrastructure Investor • November 2019

 Analysis

infrastructure investments supports resil-

ient financial returns and sustainable goals Investor ESG integration
for society, while also compelling careful
consideration and management of long
term ESG risks. On the unlisted e uity
side, managers can drive responsible actions
through direct governance, whereas on the
debt side, managers can establish regular di-
MONITORING AND
alogue with borrowers to identify emerging SET-UP DUE DILIGENCE
risks and encourage best practice through
REPORTING
benchmarking.
In this set up phase, an infrastructure
manager should
Work closely with the scheme to un-
derstand its ESG ob ectives and how to Investor
best integrate these into the investment
■ Establish and document ■ Perform manager due ■ Get involved in
strategy, and related governance and re- ESG approach in policy diligence and scoring investment decisions
porting requirements; and (if non-discretionary)
■ Integrate ESG objectives ■ Select manager
Implement the strategy taking account
into investment strategy ■ Receive regular
of market developments and the client s ■ Agree contractual ESG ESG reporting
evolving ESG re uirements. ■ Choose between pooled obligations
funds or separate accounts ■ Evaluate effectiveness
or instance, pension trustees will need
to choose the best format to hold invest-
ments, through pooled funds or separate ACTIVE ENGAGEMENT WITH MANAGER
managed accounts, and whether to dele-
Manager
gate the stewardship of ESG issues to their
managers or third-party providers. If an ■ Understand client ESG ■ Demonstrate alignment ■ Prepare ESG briefings on
objectives and integrate or involve client in capital
investor has very specific needs, a segregat- in manager strategy, ■ Conduct risk vs value due deployment
ed account in infrastructure can provide a governance, reporting diligence
■ Design comprehensive
customised solution with mandate specific
■ Implement investment ■ Evidence actions ESG portfolio reporting
parameters for ESG factors. or example, strategy
most of antage s clients have a range of ■ Benchmark against ■ Ensure Task Force on
■ Offer customised peers and seek ongoing Climate-related Financial
sector exclusions re ected in their separate
ESG solutions improvement Disclosure integration and
accounts with us and we also pay continued reporting
and careful consideration to non contractu-
al, client specific risk tolerances, especially Source: Vantage Infrastructure
to identified reputational, social or environ-
mental factors.

Favouring substance over form . Alignment. It is crucial to understand 3. Evidence. It is easy, especially for large
The second stage of integration for a pen- a manager s true aspirations in ESG, organisations with established brands
sion scheme is manager due diligence. bfi- whether its ethos aligns with the in- and large marketing departments, to
nance asset owner survey showed that vestor s and its plan to close the gap produce glossy documents celebrat-
ESG will pay a ma or role in future man- between aspirations and outcomes. In ing their ESG strategy or integration
ager selection for percent of European addition, alignment in values and invest- framework. While those are useful, it is
investors and we believe this trend is likely ment practices does not exclude room important to focus more closely on the
to strengthen. for service customisation. manager s actual processes, actions in
In this selection phase, investors are of- 2. Risk vs value diligence. ue diligence the day to day and results at the portfolio
ten assisted by asset consultants or other ad- performed by both investors and manag- and asset levels. How have the manag-
visors, which provide comprehensive ESG ers often focuses on what can go wrong. er’s asset management programmes in
uestionnaires, due diligence support and Particularly for infrastructure e uity, a ESG produced impacts and outcomes
manager scoring frameworks. With ESG manager selection would benefit from or instance, priority should be given to
labels at risk of being used as bu words, it two types of ESG reviews risk due dil- reviewing a manager s ESG report pro-
is essential for an investor in its manager se- igence and value due diligence. man- duced for its clients over that posted on
lection to look under the hood at substance ager should be able to demonstrate how its website, particularly as disclosure in
over form. their approach and practices mitigate the latter will be limited by confidenti-
We have set out a few ESG considera- ESG risk and how potential value oppor- ality restrictions applying to unlisted in-
tions for infrastructure: tunities can be systematically captured. vestments. Past investment papers, case

November 2019 • Sustainable Investing 27

 Analysis

studies and periodic asset reviews are and updates for equity investments. On inally, at antage we regard the above
also helpful documents of actual practic- the unlisted e uity side, where substan- reporting as necessary but still not su cient
es and results. tial access to ESG information typically to fulfil an investor s monitoring and report-
4. Benchmarking. Nobody ever regrets exists, comprehensive and uantitatively ing needs.
raising the bar. So, should an investor focused annual ESG reports should be Climate change in its own right is in-
be wary of managers that do not un- delivered to clients to share perspec- creasingly being recognised by multiple
dergo benchmarking Evidence should tives on investee companies material regulators as paramount to investment de-
be re uested on how a manager s tools, ESG risks and opportunities, achieve- cisions and the bar for climate related dis-
practices, achievements and innovations ments to date, action plans and, where closures from investors continues to rise.
benchmark against peers. Vantage’s par- possible, targets. t antage we now any organisations across the world will be
ticipation in P I and G ESB surveys prepare an extensive annual ESG report reporting climate related disclosures under
is not driven by a thirst for third party on our managed e uity portfolio collect- the ask orce on Climate related inancial
accolades, but a desire to deliver best in ing, analysing and comparing a broad isclosures by , with initial evidence
class client outcomes in sustainability. range of uantitative ESG measures as- for N P I signatories needed to be sub-
5. Continuous improvement. To turn set-by-asset. mitted in .
good intentions into good results, we 2. Impact quantification. A comprehen- While the C is nascent, a prudent
would expect any infrastructure manag- sive ESG client report should also cover infrastructure manager should already have
er to be able to provide past and future environmental impacts, such as carbon a plan in place to tackle its incorporation
ESG action plans, targets and pro ect emissions and abatement and resource and to report on it incrementally over time.
trackers. Sustainable improvement is a management metrics, and social impacts. t antage, we have started working on
marathon, not a sprint. It can also be useful to classify a portfo- this pro ect, with indicative risk assessments
lio company s ESG contribution map- already performed for unlisted e uity in-
Expecting excellence ping results to recognised sustainability vestments under the TCFD framework.
he third stage of ESG integration for a frameworks or targets, like the Sustaina- he next phase involves deeper dives and
pension scheme involves monitoring and ble evelopment Goals or the E Prin- uantitative analyses driven by materiality.
reporting. ciples for axonomy evelopment. hese assessments will improve an in-
This is where infrastructure managers 3. Value-orientated assessments. Period- frastructure manager s ability to exercise
can provide investors with a superior and ic reports should also incorporate ESG stewardship of climate related investment
differentiated service in ESG. risk assessments for both debt and equity decisions at the portfolio companies level.
In connection with capital deployment, assets. t antage, we have also devel- In addition, our own climate assessments
an investor with an infrastructure manager oped an in house ESG risk to value sys- have been giving more prominence to risks
appointed on a discretionary basis should tem, which sits alongside our managed than opportunities. Going forward, a more
expect as a minimum manager surveys and assets G ESB sector benchmarking balanced look at both has been identified as
portfolio review meetings covering reports. While the latter benchmarks an action item.
Examples of pursued or declined in- investee companies within their peer So, are infrastructure managers doing
vestments whereby ESG considerations groups, our tools look at ESG risks to enough to assist investors own ESG inte-
have affected the manager s ultimate de- shareholder value, thus providing clients gration In this rapidly shifting field, many
cision; and with a different comparative dimension. investors are probably still working through
Examples of manager engagement with their ESG needs. We believe that the right
issuers on new and existing investments. here is no denying that the level of re- infrastructure manager can certainly assist
On the non discretionary mandate side, porting activity described above is time- and this ourney.
an investor should see the manager s ESG resource intensive. However, it is essential year ago in this publication, we said
assessment frameworks and tools clearly to both engage transparently with our inves- our ESG ambition was to elevate antage s
deployed and incorporated in its own client tors and set internal and portfolio company ESG strategy and practices above market
investment papers. ESG strategies and targets. We have found standard.
In connection with portfolio reporting, that, in ESG, there is no substitute to rolling Our new tools and outputs since then
at antage we believe best in class service in up your sleeves. have been client centric but there is still
ESG should include three components. s active asset managers, our purpose is more we can do to push the frontier. s ig
to use ESG assessment tools and data anal- iglar would say here are no tra c ams
. Transparent fact-based outputs. A ysis to drive disciplined actions and make an on the extra mile. ■
pension fund should expect its infra- impact on each investee company.
structure manager to report on ESG However, our actions and outcomes also
matters regularly. ction programmes need to be communicated transparently and Vantage Infrastructure is an independent
investment firm comprising an experienced
and continuous monitoring should be comprehensively to the investors for their
team, longstanding institutional relationships
included in uarterly updates, ranging mapping of ESG across asset classes. his is and a diverse equity and debt infrastructure
from reporting internal ESG assessment valuable in tackling the lack of standardisa- investment portfolio with over £2.8 billion
invested in infrastructure assets across
scores alongside traditional credit rat- tion, which can make manager benchmark- Europe, North America and Australia on
ings for debt investments to highlights ing challenging in ESG. behalf of global clients

28 Infrastructure Investor • November 2019

 Analysis

Q&A
David Russell, head of responsible investment at
USS Investment Management, part of the UK’s largest
pension scheme, outlines his ESG priorities

Q What are your major concerns

regarding a GP’s environmental,
social and governance practices?
cations associated with ESG issues and views
on the N supported Principles for espon-
sible Investment and other ESG frameworks.

A Our key focus with GPs is how they are

integrating ESG issues into their de-
cision-making and management processes.
Our work does not stop there. We have
a follow on call or meeting to discuss the
findings of the uestionnaire in more de-
hese are the core aspects of ESG manage- tail, and carry out a detailed investigation
ment that we assess in our due diligence and into the track record of the GP to examine
monitoring programmes. its commitment to ESG in its past invest-
One area we expect to make more re- ments. dditionally, we have a process for
uests of GPs is to provide data so that we monitoring the ESG activities of our direct
can undertake carbon footprinting of our investments whereby a member of our team
private e uity funds. SS has undertaken will visit each company to discuss how ESG
the carbon footprinting for all our invest-
ment portfolios, but faced di culties in Q What form does this process
take?
issues are being managed. We also engage
with companies in which we hold shares on
private equity in either getting the data or
estimating it. A SS has developed its own uestion-
naire, which is sent to all potential GPs.
these issues.

As LPs are required by the Task Force

on Climate related inancial isclosures
to look at climate change and carbon foot-
his uestionnaire focuses on the following
four areas how responsible investment issues
are considered at the due diligence stage
Q Are you surprised that our
recent LP survey found that only
a minority of LPs put a big emphasis
prints across total funds, the expectations how extra financial issues are managed in the on ESG in due diligence?
placed on GPs will grow. overall management of assets the communi-
A What this means is that the ma ority will
put some emphasis on ESG in fund due

Q What role does ESG play in your

fund due diligence?
“USS has undertaken
diligence and that would seem to be a positive
step forward compared with the past. There

A he scheme has a long history in re-

sponsible investment across all asset
classes. Indeed, we developed our first policy the carbon footprinting
is obviously still some way to go, but there is
a definite growth in the number of LPs as-
sessing ESG risks in their private e uity in-
and strategy back in so we were one of vestment – for example, the level of support
the pioneers in this area and strongly believe for all our investment shown for the P I Private E uity group, and
that ESG issues have the potential to impact the growth in the number of conferences de-
companies and other assets both positively portfolios, but faced voted to private e uity ESG would be a good
and negatively . indicator of how interest continues to grow.
Our view is that companies are better difficulties in private We believe it s critical that the oversight
run if they are managing ESG risks and op- of GPs does not end with due diligence and
portunities and as a result we believe that equity in either investment – there has to be monitoring of
GPs should be encouraging portfolio com- ESG activities post investment. his serves
panies to manage ESG issues. getting the data or two purposes: so that LPs obtain assurance
herefore, every potential PE manager that ESG polices are being implemented,
and investment goes through our responsi- estimating it” and to continue to signal to GPs that LPs
ble investment due diligence process. take ESG issues seriously. ■

30 Infrastructure Investor • November 2019

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 Analysis

K E Y N O T E I N T E R V I E W

Powering the future

Mikael Karlsson, head of energy at Actis, on how access to electricity is the

bedrock of sustainable development

Q How would you describe the

scale of demand for sustainable
energy investment in emerging
SPONSOR
ACTIS
mal technologies with . GW of new ca-
pacity in the region between and
In terms of geography, around half the
.

markets right now? capital we have invested so far has been in

One out of nine people, or

electricity. round
million
around the world, do not yet have access to
percent of those peo-
Q Where do you see the biggest
opportunities?
Of the . billion of anticipated daily in-
Latin merica, a uarter in frica and a
uarter in sia. s a region, Latin meri-
ca is the most compelling because it is the
ple live in emerging markets. illions more vestment, about half a billion of that will be most advanced in terms of privatisation.
do not have access to reliable sources of in renewables. enewables are already cost frica, for example, is still dominated by
electricity. hat scarcity of supply, coupled competitive, without subsidies, in our target state investment, although there is signifi-
with robust demand and a growing accept- markets and if anything, we expect demand cant evidence that the private sector is more
ance of private investment in many mar- to increase even further as the renewable effective.
kets, creates a huge opportunity. t ctis, energy revolution drives prices lower and
we have already committed billion to
energy investments, with more than GW
pledged across our platforms, providing ac-
lower.
round percent of our current invest-
ments are in renewables. he countries we
Q Sustainability is core to your
investment philosophy. But
what does that actually mean in
cess to electricity to million people. invest in all have strong renewables resourc- practice when it comes to your
hat demand – that opportunity – will es, with net wind capacity factors of energy investments?
only continue to grow as economic devel- percent, compared with percent in Eu- ctis originated as a spin out from the
opment in emerging markets continues, rope and percent in the S. hey have government s development finance institu-
creating the need for more and more power world class solar resources too. here is tion, C C, so sustainability has always been
generation. Indeed, we expect trillion to also an opportunity, particularly in frica, to a part of who we are. We were set up to pro-
be deployed in non OEC energy invest- offer low cost baseload power that is not as mote economic development and we have
ments by . hat e uates to . billion intermittent as wind or solar. We expect gas, an A+ PRI rating. There is a very strong
a day. for example, to grow faster than other ther- correlation between cost effective and sus-

32 Infrastructure Investor • November 2019

 Analysis

Ostro: Sustainable investment in practice

Actis’s head of energy explains how its Indian wind energy platform tackled
some significant ESG issues

In ugust , ctis committed million to establish pro ects and addressed the local community s most significant
Ostro Energy a wholly owned Indian wind energy platform. challenge, access to safe drinking water. a asthan is India s
he firm backed two individuals to lead the business – now largest state and also one of the driest. ccess to drinking
Ostro s CEO and COO – and assembled a promising pipeline water is a ma or challenge for many rural villagers. his is
of pro ects. Over the next three to four months, it created compounded by the fact that the groundwater in a asthan
a fully functioning company with a team of people and has naturally occurring high uoride content. his is causing
approximately W under construction in pro ects at e uva wide spread uoride poisoning across the state, which manifests
and a garh in a asthan. in dental and skeletal problems, oint immobility and can stunt
Ostro faced a range of ESG challenges endemic in children s growth.
India, including a lack of established standards on workers he ESG sub committee agreed to direct some of the
accommodation, labour conditions, access to safe drinking water community investment budget towards safe drinking water.
and sanitation. o help management address these challenges, In addition to constructing water tanks, an altogether more
ctis created a Labour ccommodation Standards Policy, based modern and innovative solution was formulated a solar
on international best practice and ensured that this formed part powered water dispensing . he s run day and night
of any agreement with contractors. long similar lines, the firm and use reverse osmosis and to purify water. he is
also helped develop a Security Human ights Protocol in line cloud connected, enabling Ostro s head of ESG to remotely
with N voluntary guidelines. Both of these policies mitigated track the volume of water dispensed, the number of families
risk whilst elevating standards at Ostro sites, helping to build a using the machine and pay per use transactions. amilies are
higher uality and more valuable company. given a top up card to access clean water for a small amount of
he evidence base for value creation was particularly money.
compelling in relation to health and safety. rom arch Last year, ctis sold Ostro to enew Power, one of India s
to pril , for example, workers undertook , hours of biggest clean energy power producers, backed by blue chip
safety training. uring that period, ha ards were identified global institutions including investment banks, pension funds
and corrected and not a single hour of lost time was recorded and sovereign wealth funds. t the point of exit, Ostro had a
due to in ury. total capacity of more than , W, of which W was
Ostro also directly contributed to the creation of over , already commissioned. he transaction remains India s largest
obs for Indian workers during the construction phase of its ever renewables deal.

November 2019 • Sustainable Investing 33

 Analysis

“Around half the Q What are the specific challenges

associated with sustainable
investment practice in the regions
fining it and measuring it in different ways.
here is no common standard, which is why
our framework is open source. One inves-

capital we have where you operate?

Some of the markets we operate in score
tor might claim that investing in S health
clubs is making the world a better place, for

invested so far horribly on the corruption index. But for us

it is very straight forward. Because of who
example, but how does that really compare
with initiatives we are involved in around

has been in Latin we are and where we came from, because

our investors include blue chip institutions,
the world
We provided aasai tribes, living near

America, a quarter in we make it very clear that neither we nor

any representatives of our investee compa-
one of our plants in enya, with interna-
tionally accredited training so that they can

Africa and a quarter nies engage in any form of bribery activity

and we never have. We simply do not need
develop construction skills, get certified,
and come and work on our power site, or

in Asia” to.
he other ma or challenge we come
construction sites across the country. At
our wind farm in Honduras, meanwhile, we
across is contractors who need our support found local farmers only had usage rights,
in significantly improving global health and they didn t have land titles. We registered
safety standards. ake construction in India, land titles for them so that they can now
for example. We include non negotiable borrow money, or sell the land, and im-
terms and conditions around health and prove their economic situation. Which has
safety in the contract and provide interna- the more meaningful impact here is no
tionally accredited training. nd we are pre- standard to measure which is more impor-
pared to stop work at a site, if health and tant. There have been steps in the right di-
safety procedures are not being properly rection but there is still a lot to do. We are
adhered to. pioneering a path here that we hope more
people will adopt.

Q How do you approach

monitoring and measuring
sustainability? Q How does sustainable
investment practice impact
When we make an investment, we calculate returns?
what we call its benchmark impact score. We firmly believe in what we call, value
We do that continually over the course of drives value. hat means we have never seen
the investment and then, when we exit, we a compromise between responsible invest-
report on what impact that investment ac- ment and delivering competitive returns.
tually had. In fact, in our experience, it is investing
ake Indian renewables platform Os- responsibly that creates businesses that are
tro, for example. When we went into that more resilient, more innovative and better
investment in it had a score of . able to deliver societal benefits. We end up
We exited at , so that s a multiple of with assets that have excellent health and
5.5x. That was driven by the generation of safety records, ero corruption, great so-
around GW of clean energy, e uating to cial and environmental practices and strong
around a million Indian homes around . governance. That gets recognised and those
tainable electricity supply and economic de- million tonnes in CO emissions reduction assets are then more valuable on exit. Peo-
velopment. Businesses need reliable power in an area dominated by coal power genera- ple will pay more money for world class run
in order to operate. hat then creates obs, tion and the generation of . litres of clean business activities in emerging markets.
which creates economic growth. drinking water for a local community where
We routinely recruit an ESG specialist
within each energy company that we invest
in. t our frican clean energy pro ect Le-
this was the number one concern. The pro-
ect created over ,
ed almost ,
obs and we provid-
hours of safety training,
Q What does the future hold for
sustainable energy investment
in emerging markets?
kela, for example, the head of ESG was the transformed the labour accommodation and We will continue to invest in renewables.
second appointment we made after the chief created mobile health camps that benefited We will continue to invest in distribution
executive. , people. companies and gas. We also expect to see
We also establish an ESG committee at more and more storage opportunities and
each company, made up of senior manage-
ment and at least one expert from ctis. We
find this helps to set the tone by leading on
Q What challenges still
remain around measuring
sustainability?
distributed power. We are exploring stor-
age applications in two of our wind farm
pro ects in frica – one in Senegal and one
initiatives including a community invest- he problem is that, when people talk about in enya – and we expect those trends to
ment strategy for each platform. sustainability, or about impact, they are de- continue. ■

34 Infrastructure Investor • November 2019

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 Analysis

Q&A
Sixth Swedish National Pension Fund (AP6) sustainability manager
Anna Follér highlights the significance of voicing a commitment
to ESG and sharing best practice

Q How do you encourage GPs

to integrate ESG into the
investment process?
toring these are climate change and diversity
and inclusion. hese span the portfolio and
we believe the industry should work system-

A he most important tool we have is our

method of evaluating ESG in fund due
atically to improve in these areas.

diligence. We hold semi structured inter-

views with the GP aligned with the Principles
for esponsible Investment LP due diligence
Q As one LP among many in a
fund, how do you ensure your
ESG needs are taken into account?
uestionnaire. We look at the integration of
ESG into the investment process, the own-
ership phase and reporting. In each of the
A sing our evaluation method, we real-
ised that we had access to lots of really
interesting information. We started to feed
modules we have sub categories that we anonymous data back to our GPs and they
score against our own scorecard to calculate were really interested in what other GPs were
the total ESG score for the GP. template or tools. We also examine how they doing because there was so little information
We evaluate the team rather than look- report to investors and a broader set of stake- out there. any LPs send out uestionnaires
ing at individual sustainability topics in a holders and to the public. and GPs said they respond but then they
portfolio, assessing ESG related beliefs, don t hear anything more. We ve created a
policy ambitions and processes. he results
are part of the decision material that goes
to our investment committee and our board
Q Are there particular topic areas
that you are more concerned
about?
virtuous cycle of feedback and improvement
through a dialogue. We have managers at-
tention because we can give something back.
of directors. If the GP lacks commitment
or understanding of ESG, that s a risk and
is often linked to other governance factors.
A We do have two focus areas that we al-
ways cover both in diligence and moni-
Q So would you describe yourself
as an influencer?
If we decide to commit capital, we con-
tinue using this evaluation model on an an-
nual basis. It provides a baseline from where
A We don t have all the answers but we
have some observations and insights.
We do set targets – it s not that everything
we can compare results both for the GP and we do is totally ualitative. But we can have
our portfolio average over time. most in uence through dialogue rather than
ust asking for information and reporting.

Q When you are assessing the

investment team, what are you
looking for? “We’ve created
or instance, we invited our Nordic GPs to
a roundtable in to discuss where we
were in terms of gender diversity, the chal-

A Which issues they focus on, how they

evaluate what s material, how they use
it in their decision process, what s its impact.
a virtuous cycle
lenges and what to do about them. hen we
had a follow up meeting this November to
discuss concrete measures and their impact.
We try to keep this discussion concrete, in- of feedback and Everyone is really interested in this topic and
cluding recent cases where issues came up. attended, not ust with their presence but by
uring the ownership period, we look at improvement sharing their experiences. Being able to facili-
how GPs support portfolio companies, in- tate those kind of discussions is a way we have
crease knowledge and share best practice, but through a dialogue” impact. GPs also see the possibility for our
also if the GP uses standardised guidance or a practical support. It works both ways. ■

November 2019 • Sustainable Investing 37

 Analysis

E X P E R T C O M M E N T A R Y

Infrastructure debt provides secure and sustainable income streams while respecting
ESG constraints, writes Céline Tercier, head of private infrastructure
debt at Ostrum Asset Management

A secure income and green

infrastructure are compatible
he world needs trillion of investment But investing in renewables doesn t have to
SPONSOR
in infrastructure between now and to be high risk.
OSTRUM ASSET MANAGEMENT
support growth pro ections, according to One way to invest in infrastructure while
c insey. aiming to reduce the risk of loss is by in-
However, governments have limited re- and energy e cient building will offer op- vesting in the financing of infrastructure.
sources and banks, historically ma or players portunities for investors. uite simply, debt is less risky than e uity.
in financing infrastructure, now face regu- he rench Greenfin label was launched The protection is strongest for senior se-
latory constraints, especially with long term in the wake of the Paris Climate greement cured debt instruments; investors in senior
maturity loans. his creates an oppor- and is indicative of current trends. It requires secured loans have first call on the asset if
tunity for institutional investors to enter the ma ority of investments in a portfolio to something goes wrong. For pure infrastruc-
this global, deep and stable market, which contribute to financing a greener economy. ture pro ect finance, if the covenants and
Infrastructure Journal reports comprises over It also re uires measurement of the envi- agreements have been properly structured,
billion transactions annually. ronmental footprint of the portfolio, en- the protections are far stronger than for cor-
he renewables sector has expanded compassing impact assessments on climate porate bonds.
nine fold since and is likely to grow change, natural resources, including water, efault rates in infrastructure debt are
further as part of the infrastructure universe. and biodiversity. Investing in oil, gas, coal extremely low, averaging ust . percent
s reported by the International Energy and nuclear sectors is prohibited. here is a year since , suffering no spikes even
gency, energy and transport are the biggest an emphasis on energy transition and green during the financial crisis. he recovery rate
contributors to CO emissions – percent transport, buildings, water and telecoms. when a loan does default is . percent on
of the total CO fuel combustion – so it s Some investors worry that renewables average, according to oody s. his en-
likely that renewable energy, green mobility take high risks for the returns they deliver. sures that overall losses are minimised and

38 Infrastructure Investor • November 2019

 Analysis

risk ad usted returns increased. he recov-

ery rate of Ostrum s infrastructure debt Transparency helps manage ESG risks
managers is percent over two decades.
he reason for this is careful structuring and Financial risks are a critical consideration when investing in
close monitoring. Our credit documenta- infrastructure debt but there are also ESG risks – primarily that
tion asks that the borrower inform us of any transactions are less green than they first appear.
problems, propose remedial plans and allow
us to work with them. Plans are validated strategy based on pro ect finance transactions, rather than on corporate bonds,
and we monitor progress. enables better control of this. Ostrum selects transactions where the issuer
must stick to the agreed terms. solar pro ect, for example, must produce green
Mitigating credit risk electricity and nothing else. If the asset operator wants to change its business
Ostrum selects transactions with strong model, it has an obligation to ask the lender. he pro ect finance structure provides
covenants to control and protect invest- useful transparency. In addition, environmental studies are carried out to assess the
ments. If there is a problem, we have a effectiveness of each pro ect. In rance, precise carbon measurements must comply
strong security package, especially pledge with Greenfin.
of the borrower s shares, contracts or bank
account, to solve it. nother way to protect Agreed terms:
A solar project
capital and income is by investing only in es- must produce
sential assets. Ostrum s strategy invests only green
in many forms of transportation infrastruc- energy and
nothing else
ture, including bridges, tunnels, seaports
and railways, but excludes non essential
assets, such as parking lots, which are not
strategic.
In the renewables sector, Ostrum
considers all assets essential, including solar
farms, wind farms, biomass and energy from
waste. ll conventional power and natural
resource assets are excluded. Healthcare and
education facilities are considered essential,
while senior housing is not, because of the
significant real estate risk. Countries need
essential services as part of their sustainable
development, so all parties have a strong
interest in defending essential assets that
encounter problems. his is not always the
case with non essential assets.
he next line of defence against capital mise returns. t Ostrum , we divide risks
loss is to be credit focused and conservative. into two buckets: risk reducers and return
In the renewables sector, technology must enhancers.
be commercially proven to protect capital These buckets are used to create a risk
over the life of a transaction. he minimum profile that targets risk ad usted returns
internal scoring for a transaction to be in- superior to investment-grade corporate
cluded in the portfolio is BB and the overall bonds. ssets in core countries such as Ger-
strategy must have an investment-grade in- many, rance, the S and Canada, are seen
ternal scoring. as risk reducers. ssets in the periphery,
iversification of risk factors is another “Default rates often in southern European countries such
important way to avoid sector or asset-type as Spain and Italy, are considered return en-
concentration. iversification is achievable in infrastructure hancers because of their less certain business
given the depth of assets available in infra- and legal environment.
structure. he di culty lies in transaction debt are extremely Similarly, core sectors such as solar, roads
selection and being su ciently stringent in and hospitals are risk reducers because of the
transaction analysis. Ostrum , for exam- low, averaging just relative lack of complexity involved in build-
ple, selects only percent of the global pipe- ing and operating the assets. or instance, it
line, favouring the most attractive risk re- 0.56 percent a year is fairly straightforward to operate a school
turn transactions. – the operator is responsible for providing
Risk management is more than risk re- since 2005” a sturdy building with light and power. On
duction – the key is to manage risk to opti- the other hand, offshore wind is a return

November 2019 • Infrastructure Investor 39

 Analysis

Vital resource:
Ostrum considers all
“The renewables renewables essential
assets

sector has expanded

nine-fold since 2005
and is likely to grow
further as part of
the infrastructure
universe”

enhancer, because it is typically assembled transactions with high relative value. he his can lead to longer hori on returns, en-
in the deep sea, where conditions might pro- sourcing network includes industry and fi- abling investors – when re uired – to match
hibit easy building and maintenance. nancial sponsors and a variety of banking liabilities of longer than years.
he nature of cash ows is also consid- activities operating across regions and sec- einvestment also allows the strategy
ered. Schools and hospitals are risk reduc- tors. he breadth of the network facilitates to benefit from potential rises in interest
ers because they normally have long term access to deals of all si es, diversifying the rates over time. he strategy allocates to
agreements, and therefore long term portfolio. both fixed and oating rate loans favouring
and stable income streams. Cash ows Experience is essential to successful oored Euribor to minimise interest rate
from broadband networks may depend sourcing. Ostrum s former lending side risk. s a result, the gross target return is
on shorter-term contracts with operators bankers each have over years experi- above 2 percent in euros and 3.5 percent in
and ultimately with individuals, so they ence, structuring over transactions with dollars.
are less secure and are considered return only five defaults and a percent recov- or European insurers, the strategy may
enhancers. ery rate. offer favourable treatment under Solvency
Construction risks are also distribut- he strategy suits institutions looking to II, with a SC spread reduction of at least
ed across the two buckets. Brownfield as- match long term liabilities, with a liability percent compared to corporate issuers.
sets have already been built, so there is no profile that allows for illi uidity. Investing Green investments are growing faster
construction risk involved. he Ostrum in infrastructure debt can also reduce vola- than most asset classes, as governments and
strategy is focused predominantly on tility in the overall portfolio. he strategy investors push towards more sustainable prac-
brownfield however, from scratch pro ects also appeals to investors that want to allo- tices. With a robust, methodical approach,
can be financed. When well managed, this cate to assets that favour energy transition, investors should benefit from the continued
can enhance returns. he key is to balance and therefore a beneficial climate change expansion, and infrastructure debt is crucial
risk reducers with return enhancing pro- impact. to this.
ects that ustify some extra risks. While the strategy typically matches It inherently delivers stable cash ows
durations of around years, it is possible and naturally gravitates towards sustainable
Access to deals to match even longer duration liabilities. assets.
nlike listed assets, infrastructure loan Ostrum s active portfolio construction Infrastructure debt can appeal to inves-
origination requires deep sourcing and allows it to reinvest repaid loans in order tors requiring both consistent income and
structuring capabilities to ensure access to to maintain invested capital at a maximum. ESG compliant assets. ■

40 Infrastructure Investor • November 2019

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

The A-Z of
Impact Investing
So what exactly does impact investing stand for?

Impact investing is not without its critics. he holier than thou feeling that
impact proponents evoke has a tendency to get under the skin of those among
us – especially ournalists – who are more used to asking tough uestions than
claiming to change the world, writes Graeme Kerr. That scepticism reached a
crescendo this year with the news that William cGlashan, managing partner
and founder of PG s impact vehicle, the ise und, was among the parents
charged over their alleged roles in a S college admissions bribery and money
laundering scam uncovered by the BI.
ollowing on the heels of the collapse of the braa Group, an emerging
markets investor that had puffed up its impact credentials but which collapsed
after alleged financial misconduct, the irony was not lost on some of impact s
naysayers. As Time maga ine editor at large nand Giridharadas tweeted at the
time I know the Bill cGlashans of this world. I reported on them. I argue
with them now. hey email me. hey me. nd they explain that I don t
get it. I m too negative. hey are solving real problems. I m ust writing about
things.
Our of Impact Investing comes at the issue from a different angle. t
Infrastructure Investor we have watched the emergence of the impact investing
movement with interest. here are clear issues notably, what exactly is the
difference between responsible and impact investing, and how exactly can you
measure impact?
But we really wanted ust to drill down and ask the most basic uestion
of all what is impact investing his is an attempt to do ust that. nd
where better to ask that uestion than at the Global Impact Investing Network
Investing orum, in the company of artist Lee Playle We ui ed delegates
about what the letters should stand for and Lee produced separate illustrations
during the course of the two-day conference.
rguments raged about what we should feature, but the resulting two metre
by three metre illustrated wall became one of the talking points of the forum.
es, there are remain sceptical voices out there about whether impact can
achieve all that its proponents claim. But if you re looking to survey exactly what
it is trying to do, our is a great place to start. I hope you en oy it as much as
we en oyed producing it. ■

Illustrations: Lee Playle

November 2019 • Sustainable Investing 41

 Analysis

Six trends
shaping the
impact sector
From agriculture to zero waste, our A-Z demonstrates
how impact investing is becoming an essential element of
many ESG strategies, writes Amy Carroll

Do you track performance to the UN SDGs?

A united approach
The term 'impact investment' was
Yes, for some of No, though we plan to
coined in 2007 by the Rockefellers, do so in the near future
our investments
putting a name to investments made
with the intention of generating 20% 15%
both financial returns and social or
environmental good. Interest in impact
investing escalated, meanwhile, in
the aftermath of a financial crisis that
undermined the credibility of the No, and we
traditional capitalist system. don’t have any
foreseeable plans Yes, for all of
But it wasn’t until the UN Sustainable Development Goals
to do so our investments
came into force in 2015 that this nascent industry was able
to unite behind a collective set of ambitions. “The SDGs are 23% 42%
incredibly important,” says Tania Carnegie, leader of the impact
venture practice at KPMG. “They help articulate the contribution Source: GIIN survey of impact investors
being made towards solving the bigger picture challenges that
society is facing.” Global Impact Investing Network’s 2019 annual survey, up
The UN estimates that somewhere between $5 trillion and from just over half in the previous 12 months.
$7 trillion will be required annually to help achieve its 17 goals Institutional investors, in particular, are keen that
and 169 associated targets, by 2030, so the SDGs are clearly a managers position their strategies in the context of the
galvanising force. SDGs. However, there is a danger that the goals can be
Almost two-thirds of impact investment managers are using more readily incorporated into marketing materials than
this framework to track their performance, according to the investment practice.

2/3
Proportion of impact investors using
$5trn
Minimum the UN believes is
90%
Proportion of impact investors who
the UN Sustainable Development necessary every year to help achieve say their financial expectations have
Goals to track impact performance its 17 Sustainable Development Goals been met or exceeded

42 Infrastructure Investor • November 2019

 Analysis

Beyond the environment Many happy returns

Although global warming commands column inches and Of course, by definition,
investment dollars, impact does not exist exclusively in the impact investments need to
environmental domain. A plethora of sub-sectors has emerged meet financial targets as well
addressing wider societal challenges. Affordable housing is as drive environmental or
a prevalent theme – “keeping rents down for existing tenants social outcomes. This sector
through energy retrofits, for example”, says Rekha Unnithan, is no longer the preserve of
portfolio manager for impact investing at Nuveen. “The idea is philanthropists. Although
to provide stability of housing for the working population.” expectations vary, GIIN’s latest
Inclusive financial services that provide credit, savings or survey suggests that around
insurance products, for instance, to low-income customers also two-thirds of investors are
help eradicate poverty and promote individual and community
autonomy.
Targeted financial returns
“If people lack access to finance
or face high costs of capital, it is Below-market-rate
very difficult to improve their lives returns: closer to
capital preservation
or grow their businesses,” says
Taylor Jordan of Goldman Sachs 15%
Asset Management. “If you can
provide appropriately structured
financial services to underserved
populations at the right price,
you open up opportunities and
Below-market- Risk-adjusted,
develop local economies.”
rate returns: market-rate
Health and wellbeing is another closer to market rate returns
critical area for impact investors and correlates to number three
of the UN’s Sustainable Development Goals. Indeed, according
19% 66%
to the GIIN’s 2019 survey, healthcare is one of the top-three Source: GIIN survey of impact investors
target areas, behind energy and food and agriculture.
Education, too, is an area of impact investment. According to
the UNESCO Institute for Statistics, one in five children around now seeking market-rate returns. Still more significantly,
the world are currently out of school, while just 0.5 percent of over 90 percent of respondents reported that their financial
global spending on education goes to low-income nations. expectations had been met or exceeded, while 98 percent said
the same was true of their impact goals.
Another study, by Moneyfacts, looked at the performance
Sector allocations of impact investors (%)
of ethical funds compared with their mainstream peers over
0 20 40 60 four timeframes and in five categories. It found that the
former outperformed the latter in 13 out of 20 scenarios. Early
Food and agriculture
indications are that impact investment can deliver on its dual
Energy objectives. “Impact investment is completely commercially
Healthcare viable in our view,” says Shami Nissan, head of responsible
Education investment at Actis. “That view is based on a long track record
that spans several decades and a guiding philosophy that value
Financial services (excl microfinance)
drives value. Some may see an inherent conflict or need to
Housing compromise either financial returns or impact, but our view is
Microfinance that the two are mutually supportive.”
ICT However, the fledgling impact investment asset class has
only really experienced a protracted bull run. It is unproven
Water and sanitation hygiene
in a downturn, a challenge it may have to face sooner than it
Infrastructure
would like. “The industry hasn’t experienced a downcycle,”
Manufacturing says Paul Hastings’ counsel Vadim Avdeychik. “It is a relatively
Forestry recent phenomenon, so it will be interesting to see how impact
Arts and culture
investments perform when the cycle turns.
“Our clients certainly seem to believe that impact investment
Other
should outperform, however, because it offers a truly new way of
looking at the world.”
Source: GIIN survey of impact investors

November 2019 • Sustainable Investing 43

 Analysis

Millennial momentum risk, environmental concerns have come to dominate the impact
The ability to measure agenda.
impact may remain a work Impact investments tackling climate change can range from
in progress, but there is a solar and wind energy projects or battery storage to energy
millennial momentum that is efficiency plays, sustainable transport, sustainable materials and
building behind the impact sustainable agriculture. And, of course, the positive impacts of
movement. such investment can be felt far beyond the physical environment
Although successive itself.
generations enjoyed ever “Climate change has already risen up the agenda,” says
increasing standards of Clarissa De Franco, managing director of Africa Funds at
living throughout the 20th CDC. “But we will see ever more focus on this because it’s so
century, that pattern has now gone into reverse. Millennials, on intertwined with other impact objectives – you can’t tackle
average, have household incomes that are 4 percent lower than hunger if the land you grow food on is flooded or too dry.
members of Generation X. And the incomes of members of “Climate change is such a huge issue that impacts society
Generation X when they were in their early 30s were 30 percent and the environment on so many levels, from the economy,
higher than those of the baby boomer generation that came human health and the ability to feed people through to water
before them. availability and civil unrest,” adds Nissan.
Meanwhile, millennials – spurred on by role models from “It is the number one issue that we face as a society and a
their own age group, who appear to have embraced capitalism planet.”
without compromising their ideals – are increasingly shunning
traditional forms of financially focused investment to use their
money as a force for positive change. Measuring progress
“The generational shift we see with millennials, coupled with To maintain standards, it is
the increasing participation of high-net-worth individuals and imperative that we are able to
women, is driving impact investment,” says Nissan of Actis. measure impact performance.
“These groups really care about how their capital can be used Investors need to be able to
for positive societal and environmental outcomes.” assess and benchmark impact
Young workforces are demanding higher standards managers’ track records of
from their employers. Young entrepreneurs are combining delivering on their laudable
commercial acumen and tech savvy with a deep-rooted desire aims. “There is a heightened
to address global issues. This generation has also rediscovered expectation of trust associated
a passion for engaging directly with politicians, while the with impact investing,” says
inexorable rise of social media is helping to spread their Carnegie. “So, being able to
message far and wide. deliver on the promise in your investment thesis, being able
Millennials are a relentless driving force behind the explosion to live up to that expectation of trust, is essential. Measuring
we are witnessing in impact investing, as they seek to shift the outcomes is a part of that process.”
focus of capitalism from self interest to the wider good. With The ability to measure performance has been hindered, to
the ongoing transfer of wealth from older generations expected some extent, by the industry’s relative immaturity. The majority
to reach $24 trillion by 2020, the potential for impact could be of impact funds have long-term investment horizons and it won’t
huge. be until those come of age that outcomes can accurately be
assessed.
Nonetheless, an array of different frameworks have emerged,
A climate for change designed to assist the measurement process. These systems
Nowhere is the millennial have been developed by individual managers – which have
voice louder than in the then opened them up in the collaborative spirit for which impact
campaign to combat global investment has become known – or else by myriad industry
warming. “The millennials associations. But, in many ways, this proliferation has become
and younger generations are part of the problem.
leading the climate protests “There is a great deal of fragmentation, and that creates
and they want to see that challenges around benchmarking and best practice,” says
impact is fully integrated into Runjhun Kudaisya, counsel at law firm Paul Hastings. “The market
investment decisions,” says is lacking a common language and there is definitely a need for
Jordan of GSAM. Jordan co-founded impact investing firm more clarity.”
Imprint Capital which was acquired by GSAM in 2015. “Investors will ultimately coalesce around one framework or
And indeed, with the UN Intergovernmental Panel on Climate another. That is the way that it always happens,” adds Avdeychik
Change’s dire warning last year that we only have 12 years left of Paul Hastings. “That is what is needed for this industry to
to contain global warming without putting millions of lives at move forward.” ■

44 Infrastructure Investor • November 2019

 Analysis

E X P E R T C O M M E N T A R Y

Infrastructure is central to climate change mitigation and adaptation,

writes Gregory Smith, CEO of InstarAGF Asset Management, and
can forge a more sustainable path to long-term prosperity

Pathway
to the next level
ccording to the S National eronaut- climate conditions and achieve a cleaner,
SPONSOR
ics and Space dministration, one of the low carbon economy. nfortunately, eco-
InstarAGF
world s leading climate research agencies, nomic models of climate change still tend
of the warmest years on record have to overlook the role of innovation, and how
all occurred since . While the issue of It is estimated by the Global Commis- failing to promote and pay for it today will
whether climate change is occurring has sion on the Economy and Climate that the dramatically increase the eventual costs of
largely been settled, the debate around world s existing stock and use of infrastruc- climate change. Indeed, the biggest eco-
what to do about it continues against the ture is associated with more than percent nomic uestions and challenges in our fu-
backdrop of the massive storms, heatwaves, of global greenhouse gas emissions, making ture will relate to ust how extreme global
drought and record wildfires produced by climate smart infrastructure investment cen- warming will be, what parts of the world will
global warming. tral to the sustainability imperative – and op- be most affected, and whether we are at risk
In the past three years alone, the S has portunity – now before us. This imperative of permanently losing productive capacity
experienced separate billion dollar weath- is even more pronounced given the current within the global economy.
er related disasters, with the total cost of such infrastructure deficit and the negative cas- hese challenges are further complicat-
occurrences reaching billion dollars in cading effect of deteriorating infrastructure ed by the profound shifts already underway
the last five years, according to the Nation- on a nation’s economy and competitiveness. in geography, demographics, technology
al Centers for Environmental Information. With emissions at a record high in and infrastructure, which are interdepend-
While this cost is staggering, it is a fraction of and continuing to rise, it is widely agreed ent and extremely hard to predict. here is
the many ways in which climate change causes that innovation is re uired to acceler- also the phenomenon of path dependency,
damage. ate mitigation and adaptation to changing where history, expectations and vested in-

November 2019 • Sustainable Investing 45

 Analysis

terests tend to matter greatly in determin-

ing eventual outcomes, creating obstacles to A tale of two green cities
innovation in all its forms.
Innovation is often considered syn- Toronto and Chicago lead the way in innovative sustainable
onymous with technological progress, initiatives
with many believing that high tech break-
throughs such as carbon dioxide air capture In , oronto was the first city in North merica to adopt a bylaw to re uire
are the best hope to slow global warming. and govern the construction of green roofs for new developments with the goal of
While technology is a key enabler for a enhancing biodiversity and lowering energy costs. oday the city has . million
greener, more e cient economy, innovation s uare feet of new green roof area, which has saved . million kilowatt hours of
can and should be defined more broadly it energy while offsetting greenhouse gas emissions and diverting million litres of
is about turning any idea into a solution that storm water from sewers annually.
adds value from a stakeholder s perspective. In Chicago, urban planners built in climate change resilience by creating
In applying this lens, it seems likely that permeable, high albedo pavements to replace , acres of impermeable paved
even the best technologies, many of which alleyways in the city to allow stormwater to filter through catch basins to capture
have yet to be proven or even invented, will water and funnel it into the ground, and to re ect sunlight to reduce the heat island
fall far short of the mark in the absence of a effect. hese measures will improve the environment by mitigating ooding and
shared will and community engagement to saving the city money over the longer term.
change, act and transform.
undamentally, a ma or shift in econom-
ic planning is re uired to promote lower
carbon systems and investments. Infrastruc-
ture uni uely resides at the nexus of our
economic potential and the climate change
imperative, and is the key determinant of
our ability to thrive and prosper. better
approach to economic planning necessarily
includes a better approach to infrastructure
planning a larger scale, up front undertak-
ing that more fully identifies environmental
sensitivities, and other systems and values to
help avoid, minimise and mitigate impacts
while adapting to current and future climate
risks.
Whereas poorly conceived or sited in-
frastructure is a ma or part of economic and
climate management challenges, when exe-
cuted properly, it can be a ma or part of the
solution. Over the next years, more than
trillion in infrastructure investment
will be needed worldwide according to the
Global Commission on the Economy and
Climate, which also estimates that bold cli-
mate action in this area could deliver at least
trillion in economic benefits through
. How we build our infrastructure will
clearly be a ma or determinant of our future impact. While grey infrastructure can be wetlands, ravines and riparian ones, green
economic potential and the very health of made more resilient by better incorporating roofs and walls, porous surfaces and re ec-
our planet. environmental, social and governance con- tive pavements, and urban agriculture.
siderations into design and delivery, natural Combining such elements addresses a
Rising to the green challenge ‘green’ infrastructure is an important com- specific infrastructure need while tangibly
Innovation in sustainable infrastructure plement to our built environment that offers enhancing air and water uality, improving
design and delivery should encompass the the potential for more exible, cost effective biodiversity, elevating the overall appeal of
inclusion of natural infrastructure systems solutions with myriad economic and social a city’s urban architecture and creating new
within our built environment. benefits. economic opportunities.
Natural systems are those that occur Green infrastructure initiatives can in- echnology also plays an essential role
organically or are constructed and actively clude urban forests and woodlots, bioswales, in the greening effort. Plans for New ork s
managed by humans to direct and amplify engineered wetlands and stormwater ponds, Lowline, intended to be an underground

46 Infrastructure Investor • November 2019

 Analysis

park in an historic trolley terminal on the green investment and finance, and harness-
Lower East Side, would make it the first un-
derground park using fibre optics to create
“Infrastructure ing skills and knowledge for green growth.
Infrastructure investors in particular
remote skylights, effectively bringing sun-
light underground.
investors in particular have a distinct opportunity to shape and ac-
complish sustainability goals given the long
his pro ect will reclaim unused space in
a dense city while creating a green respite
have a distinct duration and essential nature of infrastruc-
ture assets.
and cultural attraction. rom an infrastruc-
ture perspective, this pro ect may encourage
opportunity to shape ccording to Pre in, nearly half of al-
ternative fund managers will consider ESG
other cities and developers to think more
broadly about alternative approaches to en-
and accomplish principles in every investment they make by
. In private markets, the N backed
hancing urban biodiversity and how to bal-
ance green and grey.
sustainability Principles for esponsible Investment re-
ports that two out of every three limited
According to the report Delivering Urban
Resilience, city leaders, planners and infra-
goals given the partners consider responsible investment in
their selection of fund managers.
structure developers often lack the data and
tools needed to understand and uantify the
long duration and Simply, ensuring that infrastructure in-
vestments are sustainable is critical to the
costs and benefits of technologies such as
green roofs and porous pavements, result-
essential nature of future of our planet. his includes iden-
tifying, assessing, pricing, managing and
ing in mismanagement, costs and decreased
liveability and resilience.
infrastructure assets” monitoring material ESG risks with a best
practice mindset. It relates to preserving and
lthough there is no overall agreed mod- enhancing the value of an asset throughout
el yet to address the complexity of this task, the investment process starting from orig-
efforts are underway to assign economic val- ination to execution, asset management
ue to sustainable infrastructure benefits and and divestment. nd it relates to making a
to instil this awareness into decision mak- concerted effort to design and deliver infra-
ing. ore broadly, there are also steps that structure that promotes inclusive economic
should be taken by policymakers to create a growth, poverty reduction and a better ual-
financing and regulatory environment that ity of life.
entices more private sector capital ows to With the global capital allocated to in-
sustainable infrastructure, including allow- frastructure expected to more than double
ing for a wider array of financial instruments by , infrastructure investors can ex-
and funding models to improve risk return ercise greater in uence and foster more
profiles for private investors. transparency on sustainability matters, and
vital part of sustainable infrastructure accordingly, actively add value to an invest-
planning includes more fully engaging com- ment and the surrounding community.
munities in infrastructure design and grass- Over the past years, growing awareness
roots green innovation to meet local and of climate change has helped to spur the con-
regional needs. Infrastructure development versation on sustainability in the infrastruc-
that represents the values, history, culture, ture sector away from a tick-box exercise to
commerce and geography of a community a process of in uencing tangible change for
is key to supporting a strong economy, vi- the better. ll infrastructure assets by their
brant neighbourhoods and a distinct sense nature have a profound ESG footprint with
of place. both positive and negative impacts across the
Green infrastructure is often more vis- environmental and social spectrum, whether
ible than grey infrastructure, at once im- the asset is a renewable power facility or an
proving sustainability while creating the airport or energy infrastructure.
potential for creative design elements, such Investing for a more sustainable future
as fountains fed by rain water or artist-de- means that we must each strive to better
signed stormwater infrastructure, to beauti- manage the panoply of ESG risks and op-
fy the urban landscape and educate citi ens portunities before us with a best practice
on environmental protection. mindset and commitment to responsible
stewardship that creates value for future
Investing as a force for change generations. Stepping up to a new level of
he private sector is a critical partner with sustainable infrastructure investment de-
governments and stakeholders in address- mands we focus on the possibilities and
ing climate change and collaborating on remember that the environment is the one
environmental issues, including mobilising asset we all share. ■

November 2019 • Sustainable Investing 47

 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Agri-investing Blockchain
For investors looking to tackle global warming Could blockchain prove to be the missing link in
concerns, agriculture is one of the sectors that can the impact investment chain?
have the biggest impact on the environment.
Best known as the decentralised or distributed ledger that
Hot on the heels of the N Intergovernmental Panel on Climate underpins cryptocurrencies such as Bitcoin, blockchain
Change s worrying global land use report, Climate Change and technology is being used to create impact tokens that investors
Land, eremy Coller s arm nimal Investment isk eturn can use to fund pro ects.
initiative published a separate study highlighting the same t the forefront is oeda Seeds Bank, a Bra ilian micro
concerns: food production’s impact on the environment. finance technology company, which won first place in a N
Both reports featured e ually daunting findings, with the sponsored ‘hackathon’. Lack of access to banking is a big barrier
IPCC estimating that if pre and post production is considered, to small businesses in emerging markets. oeda uses blockchain
agriculture, forestry and other land uses account for technology to connect impact pro ects directly to investors. he
percent of all human made carbon emissions. he I digital ledger also allows investors to keep track of a pro ect s
Index found of the largest animal protein producers progress and offers accountability, thereby helping to provide
globally processing billion animals a year and accounting investors with proof of impact.
for percent of all emissions fail to accurately measure their In arch, oeda partnered with private e uity impact
greenhouse gas emissions. investor Bamboo Capital Partners and the government of ogo
But with so much work to be done to improve the to launch the BLOC fund. Its target is to invest million in
sustainability of global food production processes, the impact blockchain pro ects that could benefit low and middle income
investment opportunity is e ually significant. he decades long populations in emerging markets.
focus on fossil fuels has put coal firmly on the road to becoming lorian emmerich, managing partner of Bamboo Capital
a stranded asset – the Coller Capital chief investment o cer has Partners, says blockchain is one of the biggest untapped impact
suggested something similar could happen with the food we eat. investment opportunities and has the potential to transform
he Paris agreement is impossible to achieve without millions of lives in some of the poorest regions of the world.
tackling factory farm emissions, Coller, a long time vegan, said he ogo government agrees. Cina Lawson, the country s
at the launch of the I Index. Coal is a stranded asset, minister of posts, digital economy and tech innovation, believes
and cows are the new coal. the fund will attract the most innovative international companies
developing tech solutions which can improve the living
conditions of people in ogo and across frica. It will also serve
to support local tech entrepreneurs to grow their businesses,
providing them with capital and tech expertise.

48 Infrastructure Investor • November 2019

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Clean technology
“Climate change is such a huge issue that impacts society and the environment on so many
levels – from the economy, human health and the ability to feed people, through to water
availability and civil unrest,” says Shami Nissan, head of responsible investment at Actis.

It is the number one issue that we face as a society and a investors need to be careful about capital intensity and
planet. s a result, you cannot overstate the impact of clean adoption curves.
energy on sustainability. It s a view shared by Helt er. Climate change is
Indeed, clean energy is one of the largest parts of the , lb gorilla, he says. ou have governments,
the clean technology landscape, with the World Energy the private sector and civil society all working towards
Outlook 2018 report from the International Energy gency addressing what has become imperative. From an
estimating that investments in renewable energy supplies investment and business perspective, one of the most
will need to reach more than trillion a year to . significant developments is the creation of the ask orce
nd we are currently nowhere near this – in , on Climate related inancial isclosures because it will
billion was invested globally in renewable power and fuels, force investment managers to think more critically and
according to the Renewables 2019 Global Status Report – work tangibly to address the risks and opportunities. hat
which suggests that, as the global economy moves towards clearly presents increased scope for growth in the clean
decarbonisation, there is plenty of scope for investment in technology sector.
renewables. lthough clean technology may have got off to a
hat does not ust mean investing in solar or wind di cult start, with many early investments in clean energy
pro ects. One of the biggest developments we re seeing in particular yielding poor returns for investors, significant
is in battery storage for renewable energy, says dam reductions in the cost of solar and wind technologies over
Helt er, head of ESG and sustainability at Partners Group. recent years have made this part of the sector much more
hat is clearly critical for more widespread adoption competitive. here are also new types of clean technology
of clean power sources. We ve invested in a renewables emerging. We are increasingly seeing capital light business
platform in ustralia, for example, and that has a highly models that promote greater resource e ciency, says
scalable battery storage component to the business. ordan.
et there are many other strands to clean technology Energy e ciency is a key strand here, adds Helt er.
– from energy e ciency and sustainable transport to One of our investments, echem, for example, is now
sustainable materials and e cient food production and managing the transition of millions of residents across
agriculture. Clean technology cuts across multiple Europe to meters. Previously their energy and water bills
industries, says aylor ordan, managing director at were based on the si e of their apartment. But by billing
Goldman Sachs sset anagement. here are several them according to usage, consumption has reduced by
themes that we believe benefit from macro tailwinds, but percent or more.

November 2019 • Sustainable Investing 49

 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Diversity Education
Diversity has been in the spotlight in recent years According to the UNESCO Institute for Statistics,
with institutions, particularly large US pensions, around 263 million children and adolescents are
keen to see their GPs addressing the issue out of school worldwide — equivalent to one in
within both their investment teams and portfolio five.
companies.
t the same time, of all the money in the world spent on
he reason is simple gender and ethnic or cultural diversity education, only . percent goes to low income countries, even
can lead to better investment decisions, ultimately resulting in though they contain roughly the same number of children as rich
higher returns for investors. ccording to research by c insey, ones.
companies placed in the top uartile for gender diversity at the Capital Partners in its Impact Investing in Education paper
executive level are percent more likely to generate above noted Education impact investing could mobilise new funding,
average profits than those in the bottom uartile. or ethnic and enable private sector engagement in both public and private
cultural diversity, top uartile businesses are percent more education service delivery, and introduce and scale approaches
likely to outperform on EBI margin. or tools to improve e ciency of service delivery, promote
et the private e uity industry has a long way to go. ata innovation in teaching and learning methods, and monitor
compiled by Bloomberg found women account for ust percent outcomes and systemic effectiveness.
of senior investment roles at the top largest private e uity Private capital has already been doing this, all along the value
firms. In the S, a study from the night oundation this year chain. C C Group and New Enterprise ssociates have invested
found that minority owned private e uity firms accounted for directly in schools, such as Bridge International cademies, a
ust . percent of the , plus firms surveyed. enyan provider of affordable education. In , Omidyar
Not addressing diversity can have financial conse uences. Network invested in South frica s Siyavula, an educational
deficit in workplace diversity contributed to Chicago eachers technology provider. istance learning providers and groups that
Pension und passing on a million infrastructure allocation help with the transition from education to employment are also
to Blackstone and Brookfield sset anagement last year. potential targets of private capital.
Nevertheless, some firms are taking the lead, such as Carlyle Investing in the sector is not without challenges. eal si es
Group, which hired a chief diversity o cer last year. are small relative to other impact sectors. Improvements in
iversity is inevitable in impact investing, both from the way educational attainment are di cult to measure and often take
that we do and practise impact investing, the diversity and range many years to come to fruition. Patient capital is re uired to
of tools we need to use, but also the range of people we need to achieve returns and make an impact. It can also be di cult
reach, based on gender, ability, ethnic background and sexual getting buy in from the state, which sees education as falling
orientation, says aye rouillard, founder of impact foundation within its own purview. et by adopting a localised approach,
he Giving Circle of Ireland. It s part of our everyday investors are showing that these challenges are surmountable.
existence.

50 Infrastructure Investor • November 2019

 Analysis

E X P E R T C O M M E N T A R Y

While wind and solar investment are major themes in renewables,

hydropower deserves a closer look as well, says Tor Syverud, head of
hydropower investment management, Aquila Capital

The special role of

hydropower
enewables are on the rise – not only as an world, percent of the electricity is gen-
SPONSOR
increasingly important source of energy for erated from hydropower.
AQUILA CAPITAL
electricity generation, but also as a capital In , hydropower accounted for over
investment for institutional investors. On two thirds of the renewable energy gen-
the one hand, their further expansion is in- energy sources used by humans to date. It erated at , Wh, despite a significant
valuable in achieving global climate policy continues to account for the lion s share of expansion in alternative energy sources in-
goals. On the other hand, they represent in- global electricity production from renewa- cluding solar and wind. Looking ahead to
vestment opportunities with attractive and, ble energy sources with a share of more than , hydropower is forecast to hold onto
more importantly, reliable cash ow returns, percent. its share in the world s total power gener-
which makes them a suitable investment al- Currently, there are hydropower plants ation, amid a rising contribution of power
ternative in light of very low interest rates. in approximately countries around the generation expected from solar and wind
he strong expansion of renewable en- world. In , hydropower comprised a technologies.
ergy capacity in recent years can mainly be . percent share of the world s electricity Hydropower also has among the best
attributed to wind and solar energy. he generation. his share varies significantly conversion e ciencies of all energy sourc-
commitment of most institutional investors from city to city and country to country, and es, because the conversion process captures
is also focused on these two types of gen- in some cases, hydropower can completely kinetic energy and turns it directly into elec-
eration. dominate energy sources – in Norway, for tric energy, with little or no losses occurring
Nevertheless, hydropower is one of the example, hydropower makes up percent through heat or ine cient processes. he
oldest, most established and most e cient of the energy mix, and in cities across the total conversion e ciency of a hydropower

November 2019 • Sustainable Investing 51

 Analysis

plant typically ranges between per- full load hours is around three times higher
cent. This is in contrast to the approximate than wind energy and six times higher than The importance
percent e ciency of wind and percent solar.
of solar. he operating lives of hydropower plants of hydropower to
tend to be very long many power plants have
Institutional investors should been in reliable operation for more than Aquila Capital
give more consideration to hydro years. In light of this, independent electricity
Hydropower is under represented in the markets are also an opportunity. Hydropower has secured a
portfolios of institutional investors in rela- Independence from government-im- pivotal role in achieving the
tion to its importance in power generation, posed remuneration structures that are fixed world’s carbon reduction
as hydropower differs significantly in some for a certain period of time allows for ex- targets.
respects from the more common form of ibility in the electricity prices achieved and
electricity generation using wind energy or thus a certain protection against in ation. It is not only one of the oldest and
solar. he occasionally high price volatility on most proven energy sources on
Hydropower, for example, generally re- the spot markets can be effectively hedged the planet, it is also reliable, has a
quires higher upfront investments per meg- by concluding long term power purchase large storage capacity and very low
awatt hour of generation capacity. Plants agreements for at least part of the electricity operating and maintenance costs.
demand greater adaptation to the natural generated. urthermore, its energy production
elements and surroundings of the site than s a result, the yield structures of hy- is less reliant than solar and wind
the comparatively standardised solar or dropower plants show relatively low corre- energy on what time of day or
wind power plants. lations to wind energy and solar. ypically, season of the year it is.
he necessary technical know how is the correlation coe cient is below . ac- uila Capital s dedicated
also much higher and active management cording to a study conducted by the Vienna hydro team has been investing in
more complex, and in most countries, hy- niversity of echnology, which showed hydropower assets since . Since
dropower is not sub ect to public subsidies that diversification across the three types of then, we have ac uired numerous
or state guaranteed feed in tariffs. power generation and across different re- plants across Norway, Portugal
he latter is not a disadvantage per se gions has a stabilising effect on portfolios. and urkey. uila Capital has
because hydropower plants can be operated his is particularly true if the hydropower hydropower plants with a transaction
economically and with stable returns even portfolio itself is also diversified and decen- volume of . billion as of the end
without subsidy structures. Depending on tralised, meaning that temporary failures of of .
the risk appetite of investors and operators, individual plants can be compensated. recent G ESB assessment of
the electricity generated can be sold via uila Capital s assets underlined
long term purchase agreements with utili- Overcoming hydropower yield the sustainability performance of
ties and industrial consumers or directly on challenges hydropower assets and investments.
the spot market. he residual value of a hydropower plant Sm kraft, Europe s biggest
tends to be higher than solar and wind independent operator of small scale
Hydropower offers high plants, due to the long service life of the hydropower plants, was awarded
diversification potential technology and the very long or perpetual the maximum five star rating. It
ost importantly, hydropower offers signif- operating licence periods. his results in was ranked second out of 24 in an
icant diversification potential compared to a lower yield for hydropower investments analysis of the Northern European
wind and solar energy. Hydropower, for ex- during the run time of the asset. renewable power maintenance and
ample, can handle base loads, meaning that One method to increase the yield is to operation sector and its score of
electricity generation is naturally relatively add assets from a portfolio where there is far outperforms the average
stable and uctuates minimally over the no or little residual value of the hydropower of its peers. uila Capital s two
course of the day or year. The dependence plant. Such an asset might be a hydro plant hydropower funds European Hydro
on short term meteorological developments that must be sold or given back to the gov- and Capital European Hydropower
is also significantly lower. ernment for free or at a very low price. und also scored well above the
his is particularly true if the power or example, in our Portuguese invest- peer average, coming first and third
plant is linked to a storage lake. In times of ment portfolio, which currently compris- out of in a global comparison.
high production of other forms of genera- es operational small scale hydropower hese results demonstrate that
tion, the storage capacity enables the excess plants located in northern and central Por- we are driven to act responsibly
energy to be stored by filling the reservoirs. tugal with a total capacity of approximately towards our environment and
In times of high electricity demand, the W, the hydro plants will be given back providing transparency, sustainability
water is fed through the turbines and the to the Portuguese government at the end of and long term returns for our
generated electricity is distributed into the the concession rights. herefore, there is no clients.
power grid. he annual total of up to , residual value, which increases the yield in

52 Infrastructure Investor • November 2019

 Analysis

Hydropower leads renewable energy generation

this investment by moving the investment
GWh (M) returns to the front.
10 Another option is to issue a bond with
a bullet structure on the asset, in order to
reduce early debt repayments. In our Nor-
8 wegian portfolio in , we issued our first
Coal
green bond through Sm kraft, a Norwegian
Gas
hydropower operator. Proceeds from the
6 Hydro
million five year bond were used to
Wind finance the company s growth, however, it
Oil also had the desired effect of increasing the
4 yield upfront.
Solar
Other
Small plants in Norway and
2 Nuclear
northern Iberia offer investment
opportunities
he design and si e of hydropower plants
0
can vary considerably. On the one hand,
2000 2005 2010 2015 2020 2025 2030
there are huge dams with power plants that
are among the most powerful in the world.
World power generation by renewable sources
GWh (M) On the other hand, in some countries small
6 hydropower plants in the form of run of
river or reservoir power plants make an
important contribution to the decentralised
5
supply of electricity to small towns in re-
mote regions.
4 Norway is an excellent example of this.
Hydro The country is rich in water and has high
3 Wind mountain relief. his provides optimal
Solar conditions for the operation of hydropow-
er plants. Norway has a long tradition of
2
decentralised energy supply via local run
of river power plants – split between public
1 and private ownership. This makes it pos-
sible for investors there to ac uire larger
portfolios of run of river power plants and
0
operate them e ciently thanks to greater
2000 2005 2010 2015 2020 2025 2030
scalability. he high rainfall in the north of
Source: Bloomberg NEF, IEA, 2018
Portugal and Spain also offers a very attrac-
Diversification effects at the portfolio level tive environment for investments in decen-
tralised hydropower plants.
Hydropower Wind power Solar power
Hydropower plays a key role in the Eu-
Seasonal dependency Spring, autumn, Spring, autumn, Spring, summer, ropean energy transformation process, not
(highest revenues) winter winter autumn
ust because of its large production poten-
Dependency on the
Very low Low Very high tial. nlike solar and wind energy, hydro-
time of day
Annual production power is generally capable of bearing base
4,700–5,200 1,300-1,700 700-1,000
(full load hours) loads and the energy from the water can be
Generation volatility Moderate Moderate Low stored by comparatively simple means.
his is a uality of hydropower that in-
Predictability Moderate Moderate High stitutional investors can profit from. he
Operational complexity Low Moderate Low mature technology, with its long operation-
al life, high value retention and the greatest
Regulatability Moderate to high Low Low possible independence from subsidies, rep-
resents an attractive investment opportuni-
Dependence on subsidies Low High Very high
ty, particularly in the current climate of low
Source: Aquila Capital interest rates. ■

November 2019 • Sustainable Investing 53

 Capitalising on the
European Energy Transition

FOR MORE INFORMATION:

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the contents of this document also do not constitute a recommendation for any other actions. The validity of the provided information is limited to the date of preparation of this
document and may change at any time for various reasons, especially the market development. The sources of information are considered reliable and accurate, however we do not
guarantee the validity and the actuality of the provided information and disclaim all liability for any damages that may arise from the use of the information. Historical information
cannot be understood as a guarantee for future earnings. Predictions concerning future developments only represent forecasts. Statements to future economic growth depend on
historical data and objective methods of calculation and must be interpreted as forecasts. No assurances or warranties are given, that any indicative performance or return will be
achieved in the future. The terms Aquila and Aquila Capital comprise companies for alternative and real asset investments as well as sales, fund-management and service companies
of Aquila Group (“Aquila Group” meaning Aquila Capital Holding GmbH and its affiliates in the sense of sec. 15 et seq. of the German Stock Corporation Act (AktG)) . The respective
responsible legal entities of Aquila Group that offer products or services to (potential) investors/customers, are named in the corresponding agreements, sales documents or other
product information. A publication of Aquila Capital Investmentgesellschaft mbH. As of 13.03.2019.
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Financial return
Once the preserve of philanthropic efforts, deploying capital for impact has moved
squarely into the realm of investors seeking financial returns, as well as positive
social and environmental outcomes.

In fact, the definition of impact investing set out In the past there was some scepticism among the
by the Global Impact Investing Network explicitly more concessionary investors targeting the parts
includes the ob ective of financial returns. of the world with the greatest need for capital
lthough impact investing covers a range of about the motives of financial return investors. But
financial return targets, the proportion of impact we’re now seeing a sharing of ideas that improves
investors seeking market-rate returns has been practice across the board. hose focused exclusively
growing steadily and now stands at around two on impact ob ectives are now more able to see
thirds, GIIN research suggests. In addition, the how to create more sustainable businesses, and
vast ma ority of respondents to the organisation s investors with financial and impact ob ectives have a
annual survey percent report financial returns greater understanding of what can genuinely create
either in line with or exceeding their expectations impact.
even more – percent – said their impact he GIIN s ambition is for social and
expectations had been met or exceeded). Far from environmental factors to be integrated into
being uncomfortable bedfellows – as some sceptics investment decisions simply by default, as the
might believe – these figures suggest that impact normal way of doing things . We may be a
ob ectives and financial returns can easily go hand little way off this yet, but there are already some
in hand. experienced hands that can demonstrate the
here is a place in impact investing for a broad commercial imperative of impact investing.
spectrum of financial ob ectives, from concessionary If you manage social and environmental issues
to market rate and everything in between, says effectively, says Shami Nissan, head of responsible
dam Helt er, head of ESG and sustainability at investment at ctis, you are not only de risking
Partners Group. However, if you are to mobilise the business and ensuring business continuity, but
significant capital and create catalytic change, you re also more able to identify positive actions
investors need to generate a financial return. you take. If you then layer community pro ects on
here is scope for investors with different top of that, you are earning a licence to operate
ob ectives to oin forces to achieve greater impact in what can be sensitive environments. We may
as well as improve financial returns. here is a lot not take the shortest route from to B, but by
to be gained from impact investors from all parts addressing these issues, we re creating significant
of the spectrum working together, adds Helt er. value in the companies we back.

November 2019 • Sustainable Investing 55

 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Global Healthcare Inclusive

vision The third Sustainable
Development Goal, good health
finance
Impact investing may have and wellbeing, fits squarely The sector aims to establish start-
originated from small within one of the key sectors for ups, help people out of poverty
investments targeted at impact investors. and assist them with gaining
improving the lives of local more control over their lives.
communities, but the growth of Indeed, in the Global Impact Investing
the industry and the increased Network s survey of impact investors, It can cover a range of issues, from
urgency of finding solutions to healthcare sits in the top three target areas, providing financial services such as credit,
issues such as global warming behind energy and food and agriculture. pensions, insurance and savings products
have led to much greater et while healthcare may seem obvious through to offering education on household
ambitions. as an impact sector, there can be significant budgets and business management.
risk, and investors need to look carefully at If people lack access to finance
Some say the creation of the N s the type of sub-sector they support. or face high cost of capital, it is very
Sustainable evelopment Goals in In theory, all healthcare investments di cult to improve their lives or grow
has been a game changer in this respect, in can have a positive impact, says aylor their businesses, says aylor ordan,
particular as all countries agreed to adopt ordan, managing director at Goldman managing director at Goldman Sachs
them. Sachs sset anagement. sset anagement. If you can provide
We live in a very big, messy world, But the risk of unintended appropriately structured financial services
says dam Helt er, head of ESG and conse uences can be high – look at the to underserved populations at the right
sustainability at Partners Group. ou need opioid crisis. We therefore focus on price, you open up opportunities and
enormous will and resources to address healthcare solutions that materially reduce develop local economies.
the complex issues it faces – that re uires a cost and improve care in areas such as he financial services landscape in
global vision. services and technology. emerging markets has been transformed,
he S Gs have been a huge success but inclusive finance is also relevant
story because of their wide adoption. in developed markets. In the S, for
hey are the closest thing we have to a example, you have millions of people living
global strategy for improving people s in poverty without a strong social safety
lives and managing the environment and net, adds ordan. any rely on payday
our resources sustainably. hey create a lenders to cover financial shortfalls which
framework through which all actors can can lead to a vicious cycle of debt. We see
focus their efforts and build coalitions a growing set of investments that leverage
and collaboration across countries, technology and market innovations to
governments, businesses and people. bring down costs and effectively serve
underserved populations.

56 Infrastructure Investor • November 2019

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Job creation
Job creation has long been one of the metrics through which the private
equity industry has sought to convince the wider world that it has a
positive impact on the communities its investment touches.

This does not make private equity ranco. ou really have to assess whether
automatically an impact investment. he ob you are creating high uality obs. Better
creation figures publicised by individual firms and higher skilled obs improve company
and industry associations are, by and large, prospects and do more to help lift people out
incidental, and employment creation has of poverty. With higher wages, you re also
historically been a by product of investing to boosting local economies more broadly.
expand a business. aylor ordan, managing director at
et for some investors, there is a clear Goldman Sachs sset anagement, agrees.
intention to create obs as a means to develop One of our main focuses is on financial
economies and improve people s lives. C C, inclusion to create obs in underserved
the s development finance institution, communities, he explains. But if private
is one example of this. ob creation is our e uity firms are intentionally targeting ob
primary mission because we believe it leads to creation as an impact goal, there needs to be
economic empowerment and there is a strong a focus on ob uality, with income levels and
alignment with financial returns, says Clarisa benefits that genuinely make a difference in
e ranco, managing director, funds and employees lives.
capital partnerships at C C. or C C, there is also a multiplier
ob creation is particularly powerful as effect, given that it focuses on investing in
an ob ective because it has the potential to areas where capital is needed most. any
help economies meet a number of the N of the firms we ve backed over the years can
Sustainable evelopment Goals, including now attract more capital from LPs, says
no poverty, ero hunger, gender e uality, e ranco. hat means they can now also
decent work, economic growth and reducing target larger businesses. hat has a trickle
ine uality. down effect on employment uality as,
However, this is far from a simple with capital, these companies can invest in
addition game. It s not enough ust to look at training. hat allows better paid employees
the absolute numbers of added employees in to improve housing and spend on education
a business or the wider community, says e and healthcare for their families.

November 2019 • Sustainable Investing 57

 Analysis

K E Y N O T E I N T E R V I E W

ESG and SDGs: More than

just an afterthought

Meridiam’s Matthieu Muzumdar and Ginette Borduas on integrating sustainability

throughout the investment process

Q How do you ensure that

sustainable investment
principles are embedded in all your
SPONSOR
MERIDIAM
some negative impact. We need to look at
these risks and make sure they can be us-
tified and managed properly, so that the
investment decision-making? social and environmental benefits that are
Matthieu Muzumdar: We see ESG and including the ESG and S Gs aspects. he generated will counterbalance the negative
the nited Nations Sustainable evelop- investment committee meets four or five impact and produce an overall positive out-
ment Goals as a core element of our invest- times over that period, to review progress. come.
ment strategy. It is not an afterthought. It t each stage there is specific focus on sus-
is integral to our investment process. But it
goes beyond as our sustainable investment
philosophy is now enshrined in our by
tainability, which of course becomes more
nuanced as time goes by. Q What do you consider to be
best practice in terms of your
internal resourcing in this area?
laws. nd our purpose, which is to deliver
sustainable infrastructure that improves
the uality of people s lives, is even aligned
Q To what extent do you focus
on screening negative factors,
versus creating positive impact? And
MM: Because sustainability has always
been integral to our investment process,
the investment directors leading pro ects
with the S Gs. nd because, at eridiam, how do the two interact? have historically taken responsibility for
we actually develop infrastructure pro- Ginette Borduas: or us, ESG risk man- environmental, social and governance is-
ects, that investment process can last for agement and positive impact are the two sues. We felt it important that ESG wasn t
between and months. By the time sides of the same coin. New infrastructure viewed as an external add on but was fully
we start deploying capital, we have already is, by definition, complex, large and will be integrated into the way we all work. Back in
been shaping these pro ects for a long time, in use for decades, so there is bound to be , we decided that the nited Nations

58 Infrastructure Investor • November 2019

 Analysis

Senegal solar:
bringing significant
power capacity at
affordable prices

Integrating sustainable investment practice

Sustainable investment practice is integral to Meridiam’s investment philosophy

In a nutshell, what we have done is build, and now operate, We decided to downsi e to reduce the impact on the natural
solar plants which are bringing significant power capacity to the environment, says Ginette Borduas. We take the same
country at affordable prices for the utility and therefore for local approach evaluating impact on communities as well. his is the
users, at the same time creating significant secondary benefits advantage that we have in developing pro ects from the outset.
for the local community, says the firm s atthieu u umdar. We can take our time to investigate everything thoroughly
When developing a hydro powered plant in Gabon, meanwhile, to the point where we are comfortable that the positive will
eridiam took the unusual decision to downsi e the pro ect by outweigh the negative. his is our business model. We won t
almost half when the extent of potential biodiversity challenges ever do it any other way. ll of our pro ects have to go through
were uncovered in the development phase. this rigorous process in order to become a reality.

Sustainable evelopment Goals had to be same time there is a real value in having a
at the heart of all our pro ects alongside so- dedicated resource.
cial and environmental impacts. It coincid-
“To be effective, ESG
ed with the adoption by all nited Nations
member states of the genda for Sus-
tainable evelopment. We also took the
has to be front of Q Do environmental concerns
dominate or are social concerns
an equal priority?
view that we needed to have someone with
mind for those people GB: or us, because of the nature of the
full time responsibility for sustainable in- pro ects we invest in, they have always
vestment practices, which is when Ginette
actually negotiating been e ually important. he infrastructure
oined the firm. we build is, first and foremost, meant for
Ginette was able to bring added depth
construction contracts the community. Sometimes there will be a
and breadth of expertise and the ability to strong environmental component, but the
implement and monitor delivery of our
and discussing ustification is always linked to community
sustainability principles in a consistent way. benefit and social acceptability.
It gave us an additional layer of oversight
technical designs” We take great care to use a participatory
and control. I think having that combi- approach on every pro ect, engaging early
nation is important. o be effective, ESG MATTHIEU MUZUMDAR with all stakeholders, including represent-
has to be front of mind for those people atives from the population. Our strategy
actually negotiating construction contracts is to develop the pro ect alongside them.
and discussing technical designs, but at the hat s how you really ensure social ac-

November 2019 • Sustainable Investing 59

 Analysis

ceptability. It isn t something you can add

on at the end of the process. It is something
you build.
Q What do you see as the
correlation between sustainable
investment practice and returns in
Q What are the biggest challenges
for the infrastructure industry in
terms of achieving sustainability?
infrastructure? And how does the GB: One of the biggest challenges we face
MM: Every pro ect we work on will have investor community view this issue? now is actually agreeing on what needs to
specific initiatives around ob creation, MM: We believe that there is no trade off be done. Everyone says they see ESG and
apprenticeships and the participation of between being more sustainable and gen- S Gs as important. But ust how far do
small, local businesses, for example. or us erating better returns. We believe that by you go with that and what does it actual-
it has never only been around environmen- excelling in ESG, we actually reduce the ly mean to deliver positive impact How
tal concerns. volatility of our investments. It is one of should you incorporate sustainability into
the best risk mitigants that you can have. everyday business? Do we need standardi-

Q How important is measuring

and reporting on sustainability?
And what are the challenges?
I know there is debate about this in the
investor community, but over the years I
think investors have increasingly embraced
sation or do tailor made approaches make
more sense hese uestions are really im-
portant, but it is di cult to get everyone on
GB: We have developed our own, tai- this view. I also think our track record goes the same page. nother challenge is driv-
lor made methodology based on the N some way towards proving it. ing su cient investor appetite for smaller,
S G framework. We have adapted that more complex pro ects. Big pro ects always
framework, to bring it in line with the attract a lot of attention, but if you look
eridiam business model and the types of at the critical infrastructure being built in
pro ect that we are undertaking. he rea- “The infrastructure Africa and other emerging markets – waste
son we have created a bespoke framework management pro ects, potable water pro-
is that it can be challenging to find a meth- we build is, first and ects – these can be challenging and are
odology that allows you to monitor and re- often uite small. We need to find ways of
port on different types of assets in different foremost, meant for bundling these together, because it is these
geographies. here is normally a checklist, pro ects that have the potential to deliver
or set of PIs, but those can t necessarily the community” the greatest positive impact.
be adapted to specific circumstances and it Then there is the question of what you
can be di cult to tell the right story. do with stranded assets. Are they trans-
We also believe it is very important to GINETTE BORDUAS formable We are always conscious of
benchmark, however, which we do using these challenges because of the nature of
the P I, for example. his helps us to see the pro ects we are investing in. But a lot of
how we compare to a stringent framework infrastructure won t have a long term plan
and it is something we take very seriously. GB: We are very long term investors, so in place. his infrastructure will need to
We compare favourably, but we will work taking into account ESG risk also means be transitioned or replaced and the ues-
very hard to improve every year. We work looking at climate change, and carbon tion of how that will be financed is some-
hard to improve the way we manage sus- transition. hese things are incredibly im- thing that is still being discussed. I know it
tainability issues and the performance of portant to us because no-one wants to get sounds as if I am presenting more problems
our assets and ultimately, we work hard to caught with a stranded asset. That’s why than solutions, but that is why eridiam is
improve our business model over time. we select our pro ects very carefully, we always looking to the future and trying to
make sure they are well ustified and that in anticipate what challenges, but ust impor-

Q Are LP attitudes towards

sustainable practices changing?
MM: Globally speaking, we have certainly
the long term they will be sustainable. Of
course, resilience is also about adaptation.
We will look for ways to adapt an asset if
tantly opportunities, will come next.

MM: inding solutions to these problems

seen an increased focus and interest from we need to. But a lot of the work we do is is what we are all about, after all. We have
LPs on the sustainability of assets, and I see about trying to anticipate everything that developed a number of clean energy pro-
that as a very positive shift. But many of could happen over time and then pick pro- ects across frica for example, in the solar
our investors some of which have been sup- ects that will still make sense in the long and geothermal space, meeting the demand
porting us for almost years now were al- term. hat is what will bring value to the for power there in a sustainable way. We
ready opened and pioneers about this issue. asset. also have a fund dedicated to energy tran-
sition, where investments include llego
GB: Investors aren t only interested in the MM: ou have to think about the invest- which is developing charging infrastruc-
financial outcome, certainly. hey want ment profile that our LPs are looking for, ture for the further deployment of electric
to know what these assets will do for the as well. hey are not looking to make huge vehicles throughout Europe. he pension
community. They want to know what the returns but at huge risk. They are pension funds and insurance companies that make
positive impacts are. That is why it is so funds and insurance companies. They are up our investor base are committed to im-
important to have the right framework, so looking for sustainable returns over the proving the sustainability of infrastructure
that we can monitor and communicate the long term. hat is consistent with having and these are ust some of the ways we are
performance of each asset as it evolves. a sustainable investment practice. working with them to do that. ■

60 Infrastructure Investor • November 2019

 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Kids and the Low-cost housing

future generation In the UK, the lack of readily available affordable
housing remains a problem as private rents
continue to rise and sharp declines in affordability
Helping children to adapt in our rapidly changing are causing homelessness.
world begins at birth and continues through early
childhood and education for impact strategies. London and New ork based sustainable and impact investor
Bridges und anagement is one manager that aims to invest
good example of what can be achieved can be seen in the Open around the underserved parts of the . he firm s investments
Society oundations, a network of foundations, partners and in housing fall under one of its four key investment themes
pro ects in more than countries created by philanthropist stronger communities.
George Soros. Capital from its property funds, which had raised more than
One of the foundation s main ob ectives is education for all million million million as of September, has
– promoting child centred high uality schooling and teacher been invested in developing close to , homes in Greater
training, while seeking to strengthen good governance and London, of which around percent are classed as affordable
accountability across educational institutions and systems. rom housing. What we have been able to do over time is work out
providing a better future for Syrian refugee children to training ways to structure deals and work with local authorities and reduce
early childhood educators in Islamabad and providing legal advice costs on the build process so that we can increase the amount of
to oma parents, the foundation takes a broad developmental affordable housing within the overall mix, says ames aylor,
approach in all its initiatives. Bridges head of communications.
noteworthy pro ect is Sesame Workshop, an educational One of the firm s recent investments is helping to regenerate
programme specifically created to address challenges and the the centre of Croydon in south London with lower cost
needs of Syrian children now living in ordan. he programme residential units, affordable housing units and , s ft of
combines the television show Sesame Street’s expertise in mass commercial ground oorspace at aberner House.
media and educational content with the International escue Bridges also puts environmental sustainability at the centre of
Committee s expertise in con ict and displacement. Now in its its property investments. One of the residential buildings it has
third year, Sesame Workshop is expanding to reach children and developed in Hayes, located in the outskirts of west London, was
families through television, mobile phones and direct services in constructed using cross laminated timber, which reduces build
homes and preschools, giving them the skills to succeed in life. time and material wastage.
Its goal is to reach million children in Ira , Syria, Lebanon and hrough Bridges Evergreen Holdings, its long term capital
ordan over the next five years. vehicle, Bridges has also created the Ethical Housing Company,
with a goal to ac uire a portfolio of between and lower
cost homes in eesside to rent to people on lower incomes.

62 Infrastructure Investor • November 2019

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Metrics
The ability to measure impact is hugely important because it creates accountability,
says Tania Carnegie, leader of KPMG’s Impact Venture practice.

Investors need to have confidence in a manager s ability to of frameworks for measuring impact, there is still no single
generate financial returns and its ability to create social and common language. lthough tools now exist, arguably we
environmental benefit, she says. easuring both sets of have too many. We haven t yet got to the point where we
outcomes is critical to achieving that. have a widely accepted framework such as G P in the
Effective measurement and assessment is vital to accounting world, says Carnegie.
improving outcomes in impact investing, adds aryanne Investors will eventually coalesce around one framework
Hancock of nalytics, a company that helps capital or another, adds adim vdeychik of law firm Paul
allocators understand, value and manage social and Hastings. hat is what always happens, and it is what is
environmental impact. needed for the industry to move forward.
Solutions and methodologies need to stretch across eanwhile, some social impacts are simply harder to
products, industries and markets, account for magnitude of measure than others – for example, the impact of changing
impact and ultimately increase confidence and better inform gender norms or the impact of driving civic engagement.
capital allocators and decision makers. one correctly, nd, of course, predictions of impact will always be
effective assessment can help unlock the scaled capital needed estimates, ust like predictions of financial performance.
to reach the sustainable development goals. But while there are robust systems for measuring
he impact investment community has certainly made financial performance – standards and actual money to see
substantial progress over the past decade in building the along the way and at the end – tracking outcomes for people
frameworks re uired to measure outcomes. hese include and the planet is complex and expensive, explains rater,
the social return on investment, or S OI, framework, as Causality is hard to know, and the benefits can take years to
well as work carried out by the Global Impact Investing materialise.
Network and Impact anagement Pro ect. Social impact he impact industry is still in its nascent stages. Long term
consultancy Bridgespan and investor PG ise, meanwhile, investment hori ons mean both financial, and impact, track
have developed and implemented what they call the Impact records are limited. Nonetheless, developing the ability to
ultiple of oney. measure performance will prove critical to the growth of this
We are now at the point where viable and practical burgeoning asset class. easuring impact is important for
means of measuring impact are in the public domain, says the same reason that measuring anything is important – it can
Stephanie rater of Bridgespan. he existence of tools prompt action, says rater. In this case, the actions we hope
should no longer be cited as a barrier to measuring impact. to prompt include allocating capital to higher impact uses and
Challenges undoubtedly remain. espite a proliferation engaging with companies to strengthen the impact they have.

November 2019 • Sustainable Investing 63

 Analysis

K E Y N O T E I N T E R V I E W

Building a
sustainable future

Genuine sustainable impact is best achieved through new asset creation,

says David Scaysbrook, founder and managing partner of
Quinbrook Infrastructure Partners

Q What is driving the industry’s

move towards sustainable
investment practices?
SPONSOR
QUINBROOK INFRASTRUCTURE
norm. However, relatively few investors
probe much deeper than that. Having a P I
ESG rating offers additional comfort for
PARTNERS
Supported by the N s Principles for e- many LPs, because it provides a third party
sponsible Investment and, in particular, the validation of a GP s ESG credentials. hese
Sustainable evelopment Goals, there is a tainable investment practices and I don t things are definitely starting to be factored
growing appreciation among institution- think that is going to change. into investment decision making and GP
al investors of the non financial aspects of selection, but we are still at the beginning
the investment of their capital. eanwhile,
the carbon divestment movement has high- Q How are LPs approaching due
diligence in this area and is it
of the ourney.

lighted reputational risk for investors and

sustainability track record and credentials
are increasingly important in their choice of
changing?
We are seeing more uestioning around
ESG credentials from both a policy and
Q What about LP attitudes
towards impact investing? And
how does the concept of impact fit
strategy and relevant managers. investment management perspective, al- with sustainability?
It is only in the past three years that though this is often still rather superficial. or us, the two go hand in hand. We define
we have seen ESG screening factored into hree years ago, I would be able to count impact investment as the ability to meas-
manager selection criteria. hat is a very the number of due diligence uestionnaires ure incremental benefits and value creation
significant development. here is real mo- that specifically referenced sustainability from the deployment of institutional inves-
mentum building behind the need for sus- ESG on one hand. Now it is becoming the tor capital. It can be measured in many ways

64 Infrastructure Investor • November 2019

 Analysis

Sustainable asset creation in practice

In June 2019, Quinbrook Infrastructure Partners signed a
25-year Power Purchase Agreement with NV Energy for the
AC Gemini Solar + Battery Storage Project.

Located in Nevada, Gemini is believed to be the largest solar powered battery

storage system in the world to date, featuring a W photovoltaic array,
coupled with a W C battery storage system capable of storing over
, megawatt hours of low cost, renewable power each day. Gemini will be a
ma or new construction undertaking for uinbrook, at an estimated cost of
billion and extended over an month period. he pro ect is expected to use
more than . million solar modules, support over , obs and bring over
million of financial stimulus to the Nevada economy.
Gemini is a significant power infrastructure pro ect that sets new
benchmarks for the teaming of solar P and battery storage at large scale in
order to deliver low priced, renewable power to benefit the citi ens and the
economy of Nevada, says avid Scaysbrook.
Gemini has the potential to be a game changer for the deployment of
cost effective renewable power at a time when sustainable investment to
reduce emissions from power generation has never been more critical. he
long term commitment that N Energy has made to ensure that Gemini
can be built shows their commitment to harnessing the abundant and low
cost solar resource available in Nevada and matching that with the recent
advancements in battery storage pricing and capability.
he advantageous location of Gemini and the significant scale of the
pro ect means that based solely on cost factors, renewable power from Gemini
is expected to be cost competitive with traditional sources of power generation
for at least the next years, adds Scaysbrook. Gemini offers very positive
and tangible ESG impacts due to the deployment of our investors capital
in new energy infrastructure, allowing us to both create and deliver material
financial, environmental and economic benefits on their behalf.
he addition of battery storage at the Gemini site, especially during
periods of high electricity demand from Nevada power consumers, is expected
to help reduce carbon emissions from existing power generation sources
by over . million tons per year. t W of solar P capacity, Gemini
currently ranks as the second largest solar pro ect in S history and together
with the W C of battery storage capacity, offers the ability to power
over , homes in Nevada both throughout the day and into the early
evening hours.

such as ob preservation, for example, or in

uantification of carbon emissions reduc-
tions or improvements to health and safety
incremental value creation to the real time
deployment of our investors capital. Q How do you ensure that
sustainability is embedded
in all your investment and asset
through lower incident rates. But it needs to
be tangible and it needs to be ob ective.
Investors want to know that, yes, you have
Q You focus on new asset creation
in the clean energy space. What
implications does that greenfield
management decision-making? What
do you consider to be best practice?
Anyone who says they’ve cracked that nut
constructed a pro ect on time and on budget, strategy have for sustainability, and is probably exaggerating. It s still very much
but also that you have adhered to industry for impact? a work in progress for us as it is with most
best practices around all of these other are- We bring new assets into existence. We are GPs. But, for us, it starts with identification
as in the conduct of your business deploying not ust buying assets that are already oper- of meaningful sustainability indicators fol-
their capital. nd, if you can t measure it, you ational and improving them. hat is critical lowed by measurement. Over the past few
can t manage it. So, for us, impact is about because the positive and incremental im- years, we have been focused on practical
being able to directly attribute and measure pact of new build is so much greater, and so approaches to measuring non financial ben-
those especially non financial benefits and much more tangible. efits and broader value creation resulting

November 2019 • Sustainable Investing 65

 Analysis

from our investment process. Increasingly, investing by allocating their dollars that we risk despite the potential for higher returns.
we are spending more time on sustainabili- will see meaningful change. We are howev- They were very risk averse and they wanted
ty aspects of day-to-day decision-making in er, genuinely moving on from the window assets de-risked and operating before they
operational asset management post invest- dressing’ phase. were interested in investing. But now there
ment. Everyone has an ESG policy because, is a growing realisation that if you are not
But there is no industry standard in en- from a business perspective, you would be prepared to take those risks, then how can
ergy infrastructure as yet. We ask ourselves cra y not to. But the next stage is demon- you bring new and more sustainable, assets
uestions like how far do you go in your strating that policy in action with practical into existence and have the true impact that
enquiries with manufacturers of equipment examples and proof of improved invest- you are seeking dmittedly the potential
to interrogate their business and operation- ment outcomes. ltimately, we will get to return premium has made these risks eas-
al practices in supply chain management the point where institutional investors will ier for LPs to accept when there is return
for instance Is a set of initial uestions withhold their investment unless their sus- deterioration across the board in most asset
enough? Or do you need to dig deeper? Is tainability criteria are met. classes.
that practical in the cut and thrust of manag- or example, a state pension plan in here has historically been a miscon-
ing a fast paced investment timetable the S recently deselected two, very well ception in our view at least that the de-
o give you an example, there are two known GPs, because they didn t have suf- velopment and construction risk offsets the
main types of battery technology within the ficient diversity within their investment impact benefit. But investors are acknowl-
lithium landscape that we evaluate. One is team. That was a big statement for the LP edging now that by taking on development
eminently more recyclable than the other to make and it really made people sit up and and construction risk, it is possible to both
but is currently more expensive upfront. o take notice. Normally these things happen generate better returns and deliver impact
we put a value today on the likely future cost in a nuanced way, behind closed doors, but without a financial penalty.
of recycling to make the two comparable If to actually stand up and say this in public hey are more prepared now to allocate
so, how do we price that today, if the mate- was a real wake up call. a portion of their portfolio to new asset cre-
rials are not going to be recycled for another ation because they want that impact attribu-
25 years? These are the sorts of things we
are wrestling with. ust how far do you go
What are investors expectations here
Q What do you see as the
correlation between sustainable
investment practices and returns
tion. hey want to be able to say their cap-
ital is driving more sustainable outcomes.
nd, if they don t want a return penalty as a
really isn t a benchmark for best practice as- in infrastructure? And how do your result, they need to make sure the GP they
sessment right now. The concept of sustain- underlying investors view this issue? have chosen is managing construction and
able investment is still uite nascent. For us it comes back to the asset creation development risk well and has a good track
story. Not long ago, investors were reluc- record of success.

Q What are the biggest obstacles

to being able to measure and
benchmark sustainability? What
tant to allocate to strategies where GPs
were taking development and construction
Q How much further does
infrastructure have to go, as
would help you when you are an industry, to be truly sustainable?
wrestling with these issues? What do you believe can and will
I think it s definitional. Having a consensus “Ultimately, we will realistically be achieved?
among institutional investors about what he next years are going to be critical
their expectations are on criteria and meas- get to the point where from a variety of perspectives. Some of the
urement is where we need to start. We are macro trends we are experiencing have been
only custodians of their capital after all. he institutional investors incredibly helpful – low in ation, low inter-
N S Gs have been helpful in this regard. est rates and a dearth of returns in equities
hey have at least created a charter that will withhold their and fixed income, in particular – have all
people can sign up to and say, yes, we will helped drive more capital into infrastructure
subscribe to these principles when we invest. investment unless asset classes.
I think developing a greater consensus on eanwhile, new asset creation is taking
what is most important to our stakeholders their sustainability an ever bigger share of the overall alloca-
is essential for sustainable investing to con- tions pie and I believe that over the next
tinue to evolve. criteria are met” decade, new asset creation in more sustain-
able infrastructure will reach three or four

Q How successful has the industry

been, overall, in improving
sustainability? How much of a
times the capital ows that we see today. t
the same time, we are seeing the emergence
of new sub classes of assets within the sus-
differentiator is it? tainability thematic.
I think an honest assessment is that we are enewables dominate today, but we will
still very much at the beginning of what also see more opportunities in areas such as
can be achieved, and it won t be until in- waste management, recycling, water e -
vestors start voting en masse for sustainable ciency and new agricultural practices. ■

66 Infrastructure Investor • November 2019

 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Nutrition Oceans and PPP

Food insecurity is a critical issue,
and not just in the developing
clean water Development finance institutions
show how public-private
world. In the US, there are The impact opportunity partnerships can generate
supply-side investments aimed at around oceans and clean impact and returns — through
bolstering the production of milk water is extensive. It ranges direct investment in commercial
and proteins where there are from sustainable fisheries and enterprises and investment via
shortages, as well as improving aquaculture, to water purification private funds.
storage and preservation time for technologies, water-reducing
fresh foods. production processes, and Is have a strong role to play in
products and services that reduce building capacity and helping mobilise
here are also companies on the demand the use of plastic, and which commercial investor capital towards areas
side – for example, a business that helps therefore reduce the quantity of that need investment most and that have
mericans receiving Supplemental plastic ending up in the sea. the potential to create significant impact,
Nutrition ssistance Program benefits says Clarisa e ranco, managing director,
access their balances immediately. One great example is Sky Ocean entures, funds and capital partnerships at C C.
Start ups, meanwhile, are busy focusing set up by the Sky Group to invest in any commercial investors may not
on developing new sources of nutrition. impact-driven organisations that have feel comfortable yet with investing in the
Private investor Fabrice d’Erm is working innovative solutions, new science and markets we target, but if we can address the
with a company that believes protein rich technologies that can create scalable challenges these economies face and create
algae are the answer. If you don t have solutions to address the global ocean plastic sustainable industries, other investors will
the right nutrition, you can t get the right crisis, says Chris Parsons of specialist come – it ust takes time.
education, says d Erm. impact investment bank ClearlySo. nd, as with any partnership, there are
Hopefully, using algae, we can solve a However, Stephanie rater of social benefits on both sides. here is much
lot of the problems we have with nutrition impact consultancy the Bridgespan Group that other investors can learn from the
around the world, while also reducing the says the key challenge is that so many experience of Is, and we can also learn
CO emissions associated with other types businesses have negative externalities that from commercial investors, says C C
of food production. relate to clean water and clean oceans, and deputy CIO of catalyst strategies, asemin
there has not always been a way to uantify Saltuk Lamy. She points to ed ccess,
or measure these. However, there is now established to lower the cost and increase
work being done by rucost, for example, the availability of medical supplies in
which estimates the cost of using or under served markets, and Gridworks,
polluting water that is supporting activity a development and investment platform
in this area. that targets transmission, distribution and
off grid electricity in frica. Both have
received around million from C C.

November 2019 • Sustainable Investing 67

 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Quality outcomes
To be considered successful, an impact investment must achieve both its financial
and impact objectives.

Impact investing is about generating measurable, new customers, they will very likely have positive
social or environmental impact alongside financial impact. Indeed, early returns research produced
returns, says Chris Parsons of specialist impact by the Global Impact Investing Network has found
investment bank ClearlySo. We have seen clients that impact investments can perform ust as well as
that started off raising seed capital subse uently their conventional counterparts, according to Sapna
secure investments from larger, mainstream Shah, managing director of GIIN. It really ust
institutions at substantially higher valuations as comes down to manager selection, as it does for any
their business and revenues grew, showing that investment, she says.
they can deliver higher commercial value as well as But with a limited track record to draw on, there
measurable impact to investors. are a number of uestions that investors should
Parsons cites the example of Bulb Energy, which be asking of impact managers before committing
raised early capital from institutions and individuals their capital. Chief among them is how impact
in , before raising further capital at higher is measured. Investors need to understand what
valuation multiples last year. It is now seen as one frameworks are used and if results are independently
of the potential unicorns of the impact investment verified by auditors. hey also need to scrutinise
market, he says. how impact is resourced within a firm and whether
he extent to which achieving these parallel managers are genuinely investing in order to further
financial and impact outcomes is the norm is sustainable development goals or are greenwashing
unclear, however, primarily because the industry their existing strategy with an S G overlay, says
is still so young. here have yet to be a lot of big adim vdeychik of law firm Paul Hastings.
exits in the impact investing space, and even fewer vdeychik adds that investors should bear in
of these exits have been accompanied by rigorous, mind that the impact industry hasn’t experienced a
retrospective studies on their impact, so in some downturn and, with the prospect of a change in the
ways the ury is still out, says Stephanie rater of economic environment on the cards, it remains to
impact consultancy Bridgespan Group. be seen how impact will fare.
hat said, we have reason to be particularly It is a relatively recent phenomenon, so it
optimistic when impact investment is directed to will be interesting to see how impact investments
businesses in which profit and impact are inherently perform when the cycle turns, he says. Our clients
in lockstep. or example, off grid solar companies certainly seem to believe that impact investment
will only be financially successful if they can should outperform and, if it does, that will lead to
reach new customers, and if they can reach even bigger in ows of capital as a result.

68 Infrastructure Investor • November 2019

Hands on
Asset Management
With more than 3 ,000 MW and o er $17 billion of e it investing experience as
o erators an in str ra titioners, our team o ers institutional investors a differentiated
capability in ‘hands on’ active asset management. e aim to be t e o to team to e
in estors na i ate t e transition to a o er arbon t re i st e i erin rea im a t
We don’t do passive investing...

Make Quinbrook your partner in the new age of lower carbon energy.
 Analysis

E X P E R T C O M M E N T A R Y

The asset class has many unique attributes, and none more so than its centrality
to the wellbeing of our planet and the concept of sustainable investing,
writes Mark McComiskey of AVAIO

Infrastructure’s most
important role
The construction and operation of infra- that accounts for social, financial, political,
SPONSOR
structure account for roughly percent institutional and public health issues as well
AVAIO
of all carbon emissions. he technolog- as economic and environmental concerns .
ical lock in and inertia of long lived in- Curiously, many definitions of sustaina-
frastructure mean that what we build now versations about sustainable infrastructure ble infrastructure focus on the impact infra-
will determine our climate future. he ip are hampered by the lack of a commonly structure has on the environment while fail-
side of infrastructure’s outsized impact on accepted definition. efinitions matter, as ing to account for the impact the evolving
climate change, often under appreciated, is they set the terms of the discussion and lay environment will have on the infrastructure.
its uni ue vulnerability to the conse uences the foundation for translating concepts into his is a significant oversight given its role
of climate change. Long lived, high cost, actions. Overly broad definitions are chal- in providing essential services to society,
spatially fixed assets are highly vulnerable to lenging to operationalise, while unduly nar- infrastructure must be designed physically
the physical, social and regulatory impacts row definitions can lack materiality. and structured economically to be resilient
of climate change. efinitions of sustainable infrastructure to the effects of climate change. Otherwise it
ll investors in infrastructure, particu- run the full gamut, from the narrow, more is not, in any sense of the word that matters,
larly those, like IO, specialising in the literal green infrastructure , for example, sustainable.
creation of new core infrastructure assets, natural areas that provide water runoff con- or this discussion, our definition fo-
must focus on the sustainability of the infra- trol, to the expansive an approach to in- cuses on environmental considerations. In-
structure in which they invest. frastructure based on global and domestic frastructure is sustainable if, throughout
s with many areas of ESG, precise con- sustainable development goals and durability its lifecycle, it supports the sustainable and

70 Infrastructure Investor • November 2019

 Analysis

e cient use of natural resources, minimises

impact on the natural environment, lim- Rising sea levels
its all types of pollution with best feasible
technology and practices, is resilient to the The consequences of climate change can be seen clearly today
reasonably forecastable impacts of climate
change, contributes to a low carbon society, Since , the rate of sea level rise has increased from . mm a year to . mm
and provides an economic return su cient a year. s a conse uence, the National Oceanic and tmospheric dministration
to attract capital to build and maintain the predicts that disruptive coastal ooding in the S north east and areas around the
asset throughout its lifecycle. Gulf coast will increase in fre uency from three to six days a year today to
his definition is not intended to disre- days a year by . his on some of the most intensively developed real estate in
gard the importance of social, institutional, the world iami, Houston and New ork. oreover, this is a global phenomenon –
political and health issues in the develop- Ecuador has already lost percent of its land mass to rising sea levels.
ment of new infrastructure. There is some-
times a temptation to dismiss these areas as
softer or more ualitative. his is a mis-
take. t a societal level, a failure to system-
atically address these factors will undermine
the social consensus needed to create new
infrastructure and to make it sustainable.

Criticality of sustainability
So why is a focus on sustainable infrastruc-
ture critical t IO, our answer to this
uestion is informed by our status as global
citi ens and as investment managers. But
before explanations, some facts.
he reality of anthropomorphic climate
change is a fact. On this there is firm sci-
entific consensus.
he uantity of greenhouse gases al-
ready introduced into the atmosphere,
even if we were to cease all such emis-
sions today, has a warming inertia that
means significant physical impacts from
climate change are unavoidable. Even if
the world manages its carbon budget to
the degree scenario, which we are not
on track to do, the impacts of climate
change will be still more significant. On
this there is firm scientific consensus. ricanes, for example and in longer term struction and operation accounting for as
While precisely forecasting the specific structural changes such as rising sea lev- much as percent of global carbon emis-
nature, locale and timing of the impacts els and decreased agricultural productiv- sions, for the world to have any chance of
is beyond current capabilities, it is clear ity in some regions . gain, on this there meeting the degree targets, the vast ma-
that the environmental, economic and is firm scientific consensus. ority of this infrastructure will need to be
social impacts of climate change will be sustainable . s agents in the industry re-
in the aggregate negative, material and he motivation to focus on sustainable sponsible for the ma ority of global green-
widespread, and will manifest both in infrastructure is therefore two fold. irst, house gas emissions, we have the responsi-
greater short term event volatility hur- the ethical. s citi ens of the world, armed bility and the capacity to act through a focus
with an understanding of, and, importantly, on sustainable infrastructure.
su cient options to address climate change, his obligation to act is fre uently chal-

$14.1bn
it is incumbent on all of us to do everything lenged in some venues. any in the S
we can to mitigate this crisis. oreover, remain rooted in the belief that the only
those of us fortunate enough to be able to fiduciary duty of investment managers –
direct the ows of infrastructure capital are and corporate management and boards – is
in a uni ue position to be impactful. With to maximise the economic return on their
Reduction of home values
on the US east coast due to pro ections of as much as trillion in assets. his is a false dichotomy, especially
rising sea levels spending on new infrastructure in ust the for those investing in long lived infrastruc-
next years, and with infrastructure con- ture. Leaving aside for a moment the false

November 2019 • Sustainable Investing 71

 Analysis

paradigm of the inherent environment infrastructure investors are more exposed set of norms positive screening selecting
return trade off, it is worth noting that out- to the potential return impacts of climate businesses assets with a focus on sustaina-
side of the S much of the developed world change and so need to be on the leading bility and sustainability themed investing
is moving to a new understanding of fidu- edge of incorporating a clear eyed view of focusing on renewables, clean water, ener-
ciary duty, one that re uires an active con- the risks and opportunities into their under- gy e ciency, etc.
sideration of ESG factors. Canada, the writing and asset management programs. A Less common is the integration of sus-
and Germany are moving to codify this. In focus on the sustainability of infrastructure tainability risks into the underwriting pro-
Sweden, the national pension funds are re- is thus inherent to an attempt to achieve the cess in a uantitative manner. his is vital,
uired to become exemplary in the field of best risk ad usted returns for clients. especially for those focused on the creation
sustainable investment. he utch pension of new core infrastructure.
fund BP is fully integrating ESG across all Operationalising sustainability here is no single, standardised ap-
asset classes. here is an increasing consen- How to operationalise a focus on sustaina- proach to this. When underwriting a new
sus that those who can act, must act. bility in an infrastructure investment organ- pro ect, we engage experts to perform a
isation is beyond the scope of a brief article. physical risk analysis of the asset under
Investors are forward looking Properly done, it re uires an integration various climate scenarios for time peri-
he second motivation is practical. s in- of environmental considerations and risks ods ranging from five to years forward.
vestment managers, even the narrowest into all stages of the investment life cycle In the case of a coastal desalination plant,
conception of our duty is to try to earn investment selection, underwriting analysis, this might forecast items such as air tem-
the best risk ad usted returns possible for asset development and construction, and as- peratures, water temperatures and acidity,
our clients. In this context, we must all be set management. sea levels and severe weather fre uency. s
cognisant that the conse uences of climate t a high level, many organisations have with all forecasts G P, interest rate, tra c
change, while uncertain as to precise timing focused on investment selection, adopting a volume , there are uncertainties, but when
and extent, are certain to occur and to be variety of approaches exclusionary screen- well informed they provide a basis for uan-
material. s the impacts become more fre- ing avoiding industries deemed ob ection- titative analysis.
uent, severe and widespread, there will be able or business countries that violate a hese forecasts are used in multiple
an inevitable societal response, with shifts ways. They are considered in the design of
in people, capital, industry, and increasing- the infrastructure, to ensure it is su cient-
ly intense regulatory responses intended ly resilient to operate effectively in a wide
to decarbonise society. here will be real, range of climate scenarios. hey are consid-
significant impacts on infrastructure, both “Those of us fortunate ered in the negotiation of offtake contracts,
from the physical effects of climate change where we seek to pass through increases in
and from the changes in societal behaviours enough to be able operating costs that may arise as a result
and regulation. hese climate risks must of climate change. nd they are integrated
be considered at least as carefully as more to direct the flows into our underwriting, where we run sce-
traditional risks, such as commodity prices, narios that re ect the impacts on the eco-
volumes, interest rates and taxes. of infrastructure nomic performance and exit valuations that
As these trends become more pro- may arise from climate change. ssets with
nounced, they will be increasingly factored capital are in a higher negative climate impacts show lower
into capital ows and valuations. his is not risk ad usted returns, and so must have high-
a theoretical observation. recent study has unique position to be er unrisked returns to meet our hurdle rates.
shown that sea level rise has cost . bil- actoring this kind of analysis into un-
lion through the reduction of home values impactful” derwriting does not imply lower returns on
on the east coast of the nited States ust the contrary it is a key to achieving better
since . recent NBE working paper returns.
found that private real estate lenders are Infrastructure is unavoidably exposed to
increasingly shifting mortgages on proper- the impacts of climate change. any inves-
ties in areas vulnerable to climate change to tors in the sector have long investment ho-
annie ae and reddie ac, government ri ons and hold illi uid positions. s climate
sponsored enterprises. he Bank of England change impacts increase in frequency and
now re uires financial institutions to run severity, and as the investment community
climate impact scenarios in their stress tests. begins to extrapolate these trends and fac-
Public market investors and commercial tor them into valuations, infrastructure in-
lenders often have much shorter time hori- vestors will face real conse uences in their
ons and the ability to uickly shift capital portfolios. Prudent infrastructure investors
in response to emerging risks. Infrastructure need to act now to factor sustainability anal-
investors are the converse: their investments ysis and management into all stages of their
are often in illi uid assets that are inherent- investment cycle, or risk both disappointing
ly long lived, static and high cost. s such, returns and a badly compromised planet. ■

72 Infrastructure Investor • November 2019

 Analysis

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Renovation Scale Ticking clock

Retrofitting – or renovation – is The Global Impact Investing Last year, the UN
a core component of many real Network recently estimated that Intergovernmental Panel on
estate impact strategies. Nuveen, impact investment assets under Climate Change published a
for example, is an investor in management total $502 billion, landmark report that claimed
dynamic glass company View, up from $114 billion in 2016. The we only have 12 years left for
which improves the energy scale of global awareness is also global warming to be kept at
footprint of buildings. rising rapidly. a maximum of 1.5 degrees,
beyond which even half a degree
Glass needs to be replaced around GIIN has found that one in four dollars will significantly worsen risks of
every years, and iew s products are of professionally managed assets, e uating drought, floods, extreme heat
often retrofitted into existing spaces. In to around trillion, now considers and poverty for hundreds of
fact, Nuveen s own New ork o ces sustainability principles. hat means there millions of people.
are currently being fitted with the is real potential for investors, who have
automatically tinting glass. already aligned their capital with their he time we have to tackle a whole host of
enovation and retrofits are also values, to more intentionally drive progress global challenges is running out.
important components of Nuveen s through impact investment. Indeed, the most recent Goalkeepers
residential strategy. One of the firm s three In addition to these uantitative report from the Gates oundation indicates
pillars of impact is affordable housing and measures, I think there are uite a few that while progress is being made towards
the firm is continually ac uiring multi ualitative indicators of scale, including the the Sustainable evelopment Goals, it is
family housing stock, not only to improve emergence of an advisory ecosystem, says not being made fast enough to meet all the
its environmental sustainability, but also to GIIN managing director Sapna Shah. or goals by .
keep rents affordable. example, we now have auditors verifying he good news, says Stephanie
It could be something as simple as social and environmental performance and rater, partner at social impact consultancy
changing all the lightbulbs in a property to law firms working on structures, terms and the Bridgespan Group, is that there
LE , says Nuveen s portfolio manager, covenants pertinent to impact. is still a tremendous amount of private
impact investing, ekha nnithan. lot of progress has been made in the capital – more than enough to get the
We also do audits of water and energy past decade. hat said, the billion is ob done – that could be shifted towards
consumption and constantly strive to make nowhere near enough to meet the climate, impact investment in the near future.
housing as e cient as possible, even if it social and health needs the world is facing. Private capital can be mobilised faster than
was built years ago. here are always here is uite a bit further to go. any other type of capital and our hope is
things you can do at the margin to improve that the impact industry can continue to
real estate from an impact perspective. advance fast enough to meet these goals.
rankly, those things also contribute to our
bottom line.

74 Infrastructure Investor • November 2019

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

UN SDGs
The United Nations estimates that some $5 trillion to $7 trillion is required
annually to reach its 17 Sustainable Development Goals and 169 associated
targets by 2030.

hat level of support can only be reached through beyond alignment and instead, raise and direct new
the oint efforts of governments, regulators, capital towards progress against the S Gs.
academia, philanthropists and the corporate world. ccording to ekha nnithan, portfolio
But it is becoming increasingly clear that private manager, impact investing, at Nuveen, there is a risk
sector financing, and in particular the burgeoning the S Gs are being incorporated into marketing
impact industry, has a critical role to play. materials more readily than into investment
Indeed, the N S Gs have created a unifying strategies themselves. Obviously the S Gs have
force around impact, helping to provide a common really taken off. ou can t go into a European airport
motivation for the nascent impact community. he lounge these days without seeing the S Gs on
S Gs have provided an important framework and someone s laptop as part of their marketing deck,
focus for enterprises and investors in the impact nnithan says. hat is great in terms of being able
investing world, says Chris Parsons, head of to articulate what we do in the context of larger
investment banking at specialist impact investment global goals. But we are at an in exion point with
bank ClearlySo. hey have highlighted the key regards scaling with integrity and I think agreeing
social and environmental issues facing the world. and maintaining standards is key.
he S Gs are incredibly important, adds adim vdeychik, a lawyer in the investment
ania Carnegie, leader and chief catalyst of the management practice at law firm Paul Hastings,
Impact entures practice at P G. hey adds that while the S Gs have been important in
are commonly featured as part of the impact terms of helping managers identify and allocate
frameworks that our clients are developing. It helps resources consistent with those goals, the S Gs
them articulate what contribution they are making themselves have provided insu cient guidance for
to solving the bigger picture challenges that society private investors. vdeychik therefore welcomes
is facing. the standards being unveiled alongside the S Gs
ccording to the Global Impact Investing around strategic intent, measurement, transparency
Network s Annual Impact Investor Survey, more and accountability. hose standards have been
than half of investors are currently tracking some, created at the re uest of the investment community,
or all, of their impact performance against the N to help them make sure they are deploying capital in
goals. However, given the scale of capital re uired, a way that specifically contributes to those S Gs. It
the GIIN believes it is vital that more investors go is all about creating a common language, he says.

November 2019 • Sustainable Investing 75

 Analysis

E X P E R T C O M M E N T A R Y

Action-oriented engagement and a flexible approach are the key to an effective

sustainability strategy, say Angela Roshier, partner and head of asset management at
DIF Capital Partners, and Alastair Scott, partner at ERM

The path that leads

to ESG
How do you develop an effective environ- developed a plan to achieve that target. his
SPONSOR
mental, social and governance action plan for involved defining an ESG policy, assessing
DIF CAPITAL PARTNERS AND ERM
your assets? That was the question we at DIF our current investments, and developing
Capital Partners, a . billion infrastructure an ESG framework that could govern our
fund manager, sought to answer when we pro ects, some of which may be viewed as approach moving forward. To put this ap-
embarked on a pro ect with ESG consultant inherently sustainable. proach into practice, we engaged the consul-
E to better understand the sustainabili- However, our industry has changed tancy E , who demonstrated a commer-
ty impact of our investments. he resulting greatly since our founding in and al- cial understanding of I s business as well
programme has created a exible and fo- though sustainability has always been part as the principles of sustainable investing.
cused approach that contributes positively to of what we do, we understood that more oreover, being an active member of
the local community while delivering returns formally incorporating an environmental, key sustainability and industry associations,
for investors. It proves that action-oriented social and governance framework into our such as the P I, the World Business Coun-
engagement and exibility are the key to an investment decision-making process was cil for Sustainable evelopment and a con-
effective sustainability strategy. critical to address the expectations of our sultant to the ask orce of Climate related
t the core of our business, and funda- investors and other stakeholders. inancial isclosures, E is well placed
mental to I s culture, is an appreciation cknowledging that we had significant to keep I informed on ESG trends and
of the connection between our assets and room for growth with respect to our ESG on industry best practices.
their users . Indeed, our early funds fo- programme, we set a target to achieve an
cused primarily on social and transporta- score from the N supported Principles Forming policy priorities
tion infrastructure and renewable energy for esponsible Investment by and raditionally, our industry has focused on

76 Infrastructure Investor • November 2019

 Analysis

the environmental aspect of ESG but we Progress against our baseline goals (%)
2017
felt that an environmental focus was too (results
one dimensional and neglected a core issue Governance before DIF
100 involvement
for our investments safety. We therefore
developed a multi dimensional ESG policy 80 2018
(One year
that has five priorities environment, people engagement)
and communities, governance, safety and 60
2020
climate resilience the latter added in . (Expected
40
he overall ob ective of this approach is outcome)
to contribute to the well being of local com- 20
munities, to provide safe working environ- People and
ments for our employees and contractors, community 0 Safety
and to address local and global environmen-
tal challenges. chieving these ob ectives
provides benefits in itself but we also believe
that the result is a portfolio of assets that
deliver sustainable returns to our investors.

Establishing a baseline
We believe that delivering value to our in-
vestors and communities re uires a real Environment
understanding of the sustainability impacts
Source: ERM/DIF
of our assets. However, we also wanted to
avoid collecting data for the sake of data. s ESG performance of initial 26 assets surveyed in 2017
Note that this diagram does not include the ‘climate resilience’ focus area as this was only added
such, I and E developed a focused in 2018
survey for our assets that concentrated on
identifying actions on material issues with
reference to existing sustainability frame- On the road to wildlife recovery in Germany
works, guidelines and standards.
s illustrated, the first survey in set The A6 West highway in Germany – a 50km stretch of federal
the baseline and defined goals for progress, highway connecting Rauenberg and Weinsberg – now sources all
while the second survey in revealed of its electricity from renewable sources.
some interesting developments triggered by
our engagement with assets.
Within governance, the proportion of
our assets with a dedicated ESG resource
grew from percent to percent between
and . On safety, the proportion of
assets with specific health and safety policies
increased from percent to percent,
while the proportion of assets providing
health and safety training has increased
from percent to percent.
With E s input we added climate
resilience to the survey in , and found
that percent of our assets have plans in
place to deal with the impact of extreme
weather and percent consider the impact
of climate change on their long term busi-
ness plans. hese survey results have been
used to develop mutually agreed ob ectives ost of the milled asphalt of the old carriageway has been recycled and reused in the
and action plans for each individual asset, asphalt base layer under the new tarmac. Sheep gra e the lawn around rain retention
which we call the ESG Path. basins and there are artificial lakes to help manage stormwater runoff and prevent
ooding. s part of upgrades to the highway, we are creating a , s m wildlife
Driving progress sanctuary a few kilometres from the motorway near Offenau that will provide a new
Each asset s ESG Path includes habitat for insects, birds, amphibians and other creatures. any of these practices
• framework for action including spe- have been shared with I s other road assets around the world.
cific goals, the activities that need to be

November 2019 • Sustainable Investing 77

 Analysis

implemented and related timeframes while addressing the differences between

defined by the asset geographies and asset sectors, especially
• Suggestions for best practices implement-
“Within governance, as DIF continues to expand into new ge-
ed by other assets where appropriate ographies like Latin merica
• exible and focused approach, with
the proportion of our • Recognising the continued expectations
priorities and the level of engagement of investors for improved disclosure.
requested varying based on the maturity
assets with a dedicated
of the asset and the sector. On the latter point, investors have be-
ESG resource grew come a significant voice in calling for cli-
he benefit of this approach is that it is mate change risk disclosure. In this context,
measurable, repeatable and evidence based,
from 56 percent to 84 frameworks like the C are uickly
while remaining exible enough to apply to bringing shape to a once amorphous discus-
different geographies and sectors. or ex-
percent between 2017 sion. his is one area where I and E
ample, assets in North merica and ustral- expect to work together to identify further
ia require attention to the rights of indige-
and 2018” opportunities to drive a sustainability fo-
nous populations that often are not relevant cused agenda.
for European-based investments. ANGELA ROSHIER In the coming year I will also contin-
Ongoing engagement with our assets DIF Capital Partners ue to work with E to develop opportuni-
also helped us to identify areas of best prac- ties for investments that support the Sustain-
tice. In early we organised, and E able evelopment Goals, the blueprint for
facilitated, a conference where we brought sustainability adopted by all nited Nation
many of our asset managers together to dis- member states in . s illustrated above,
cuss ESG initiatives, with a specific focus on DIF has now a good understanding of
sharing best practices among our road assets. where it stands on ESG and has established
a framework and process to continue its re-
An ESG-smart deal team sponsible investment ourney.
aking genuine progress on ESG issues, With E s support, we are considering
however, re uires us to go beyond support- sector best practices and sustainability guide-
ing our existing assets to make improve- lines, maintaining a scalable, pragmatic and
ments. s such E and I also worked adaptable approach, and focusing on tangible
together to develop an ESG screening tool and effective actions to address key ESG issues.
for new investments, while E developed Looking forward Overall, we believe we have developed a
a series of interactive training modules to We can take heart from the progress we tailored ESG programme that will deliver
support I staff in using this and other have made on our ESG Path, and from the value to investors as the programme evolves
ESG tools. hese tools and training have positive difference our work makes to peo- with the environmental, social and govern-
helped our deal team to uickly identify po- ple s lives. ance needs of our stakeholders. Our most
tential environmental, social or governance In over million patients were recent ESG developments are presented
elements that might re uire focus through- treated by the hospitals and healthcare as- in our ESG report Digging Deeper on
out the due diligence process and to guide sets we fund and over , students have Sustainability. ■
investment committee members to ensure benefited from our education assets. his
all new investments are aligned with I s progress has been recognised as our PRI
ERM is the largest global pure-play provider
ESG policy and ob ectives. score has increased from a C in to an of ESG, sustainability, environment, health,
he final piece of our framework for overall in , including an score in the safety, social and process risk and asset
integrity consulting services across the
progress involves going beyond our day to infrastructure module. his puts us ahead of
investment life cycle. Its experience of
day business to make a contribution to the schedule in achieving our stated goal of an working with 100-plus general partners and
communities where we live and work. his score in . limited partners was crucial in assisting DIF
meet its objective of developing a market
has taken on a number of forms and includes here are still, however, a number of leading ESG programme. For DIF’s ESG
time spent volunteering with an endowment challenges that we must address to contin- programme, ERM assembled a global project
fund with a mission to develop renewable ue delivering value through our approach to team with a mix of experience of working
strategically and tactically with infrastructure
energy solutions for economic, social and ESG. hese challenges include funds, sector and technical expertise,
environmental humanitarian pro ects in the • Avoiding survey fatigue to ensure that knowledge of local regulations and asset-
developing world or mentoring students managers are focused on tracking and specific sensitivities

from underprivileged areas. improving performance on ESG items DIF Capital Partners is a fund manager that
invests in a wide range of international, high-
aken together, our new investment rather than continuously filling out pa-
quality infrastructure projects that generate
screening tool, our asset level engagement perwork stable, long-term cashflows. It currently
and our internal capacity building ensures • Continuing the process of scaling up manages around €5.6 billion of assets across
seven investment funds and has invested in
that we are continuously improving our ap- initiatives that have been successful on over 200 infrastructure and renewable energy
proach to sustainable investment. one, or a small number, of our assets projects since its establishment in 2005

78 Infrastructure Investor • November 2019

Delivering returns
responsibly
Sustainable infrastructure investment for today’s and future generations

A global business. A single team. Together, we make informed

and responsible investment decisions that result in attractive
returns for our investors and a positive impact on society.

Amsterdam | Frankfurt | London | Luxembourg | Madrid | Paris | Santiago | Sydney | Toronto dif.eu
 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Vulnerable Women’s
communities empowerment
Improving people’s livelihoods is a core impact Women’s empowerment can mean everything from
initiative and that requires working with those investing in female-led businesses to improving
on low incomes in the most vulnerable situations. their health, providing access to education and
Metrics for vulnerable communities include ensuring they are represented on company boards.
developing a lower-cost product or a superior
product at a lower cost, and providing access to ccording to the Overseas Private Investment Corporation,
products and services to them. women face a billion shortfall in access to credit worldwide,
and investing in women pays dividends because they spend
or emerging markets investor Leap rog Investments, the percent of their incomes on food, healthcare and education in their
vulnerable include people living with HI . Leapfrog s first ever households.
investment was in llLife, a South frican company that has built a Several agencies have women specific programmes. In
profitable operation by offering affordable life cover to those with September, spen Network for evelopment Entrepreneurs,
HI , who were automatically excluded from life insurance cover as part of a partnership with the S gency for International
because the virus can lead to I S. llLife also contacts their evelopment and the isa oundation, set up a new dvancing
clients every month to ensure they are taking their medication and Women s Empowerment und that will distribute more than
staying healthy. million over two years to organisations working to close the
he health improvements in clients are impressive – an average financing gap for women led businesses.
percent improvement in their C count a measure of the One of OPIC s big initiatives is the Women s Initiative,
strength of the immune system) within six months of being insured. which expands investments in women led businesses and funds
hrough llLife, people with HI can take out loan finance, build around the world.
their lives and participate in the community. Last year OPIC committed a . million loan to WaterHealth
eanwhile, tlantic Philanthropies investment in ital India to help installation of nearly decentralised plants to purify
Healthcare Capital, a community development financial institution, water onsite and sell it for three or four times cheaper than bottled
helped it to sustainably finance healthcare providers that could help water alternatives. part from providing clean water, the pro ect
the vulnerable in the S access primary healthcare. Cap grew is expected to create more than , obs for women under the
from a small organisation to one with million in three years, company s Women Operated Water systems programme.
and closed four investments in community health providers that One of the most dangerous activities for women, according to
serve low income communities. the Global Impact Investing Network, is collecting fuel for cooking,
particularly in refugee and con ict areas or remote rural locations.
Impact certification organisation he Gold Standard oundation
has led a pro ect to install , e cient cook stoves in enya that
improved indoor air by nearly percent and benefited more than
, people.

80 Infrastructure Investor • November 2019

 When it comes to investing, consistency is beautiful.

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 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

X-ray vision Young Zero waste

Complete transparency is
imperative for the continued
blood From plastic in our oceans and
toxic electrical goods sitting in
evolution of the impact The younger generations are landfill to food mountains and
investment industry. The impact playing an essential role in unworn fast fashion clothing
investors themselves need X-ray driving the growth of impact items, waste of resources — and
vision to effectively create and investment. One of the key the pollution this causes — is a
manage positive impact with reasons that businesses started major issue for the planet.
information-based decision to pay attention to their impact
making, says Sapna Shah of on society in the first place s little as percent of plastics are recycled
the Global Impact Investing was that a new generation of globally, and evidence is mounting that
Network. employees demanded it. developed economies, unable to recycle
the waste they are creating, are shipping
ransparency between investor and eanwhile, young entrepreneurs are plastics to emerging markets, where they
investee is also critical, Shah adds. Impact combining commercial experience and are entering water systems or being burned,
reporting provides enormous food for a strong understanding of technology creating toxic fumes. Small wonder, then,
thought. It opens up dialogue between asset with a passion and focus to address global that there is a growing movement towards
managers and their investors, about goals social and environmental issues, says Chris creating a zero-waste society.
and values and how those can better be Parsons of specialist impact investment While this is, according to aylor
achieved. bank ClearlySo. ordan, managing director at Goldman
aya Chorengel of private e uity In terms of public awareness and Sachs sset anagement, an aspiration
impact investor he ise und, meanwhile, politics, the younger generation are also – we have a long way to go , there are a
adds that impact investors need to both raising the profile of these issues with range of investment opportunities that can
measure and report impact performance policymakers, creating a move to fairer and help tackle this through the creation of a
to their partners regularly and share their more sustainable behaviour, Parsons says. circular economy.
assessment methodology more widely. he widespread use of social media, s Ben Constable axwell, head of
his commitment to transparency, meanwhile, is making it easier for young sustainable and impact investing at G
which is a core part of our belief system at people to call out bad actors , adds Sapna Investments, explains ero waste is an
ise, allows people to understand why an Shah of the Global Impact Investing approach that focuses on redesigning
investment delivers on impact and financial Network. industrial and production processes to cut
returns and can provide useful tools to inally, the ongoing transfer of wealth waste – we need to reduce, reuse, repair,
others entering the market, ultimately from older generations to millennials, recycle. his has been thrown into relief
helping expand the pool of capital which is expected to reach trillion by by the plastic crisis and China s decision
dedicated to fostering change and actually , is likely to drive demand for more to stop accepting other countries’ waste.
achieving the positive outcomes we seek, sustainable investment strategies and We have to get to the problem before it is
she says. products. created – we can t ust rely on recycling.

82 Infrastructure Investor • November 2019

KGAL’S RENEWABLE ENERGY FUND ESPF4
HAS ACHIEVED ITS FINAL CLOSE

750 MILLION EURO

▪ Pan-European renewable energies fund
▪ Core-plus investment strategy covering the entire value-chain:
from brownfield to greenfield
▪ Diversified investor base from Europe and Asia
▪ Strongly supports sustainability: approx. 1.4 GW allocated in
renewable energies when fully invested

KGAL’s investments in renewable energies focus on a diverse The investments focus on long-term capital investments for
portfolio in the wind power, photovoltaics and hydropower institutional and private investors in real estate, infrastructure
sectors. Since 2000, the company has invested in 130 assets and aviation. The Group, founded more than 50 years ago,
across Europe with a total volume of approx. €2.8 billion. operates across Europe and has its registered office in Grünwald
near Munich. Taking into account aspects of revenue and risk,
KGAL Group is a leading independent investment and asset 355 employees help achieve stable yields on a sustainable
manager with an investment volume of around €20.5 billion. basis. (As at 31 December 2018)
 Last word

ESG points of view

“The impact-investing “We place more

“Incorporating a
brand is definitely emphasis on
focus on resiliency –
appealing right now. understanding the
physical, locational
And it is tempting for way our managers
or environmental
fund managers to do a engage with their
– is a key component
pretty paint job on it” investee companies
of investing with a
about their social
Amit Bouri, CEO of the Global Impact sustainability lens”
and environmental
Investing Network, warns of the
dangers of ‘greenwashing’ impact
strategies
Dara Friedman of BentallGreenOak
impacts” calls for a holistic approach to ESG
investing

Wendy Norris of Future Fund on

responding to scrutiny of responsible
investing

“There is still
variability among “It doesn’t have to be
“If impact was altruistic. We do it
investors but, for
properly measured, because it makes
most, ESG has now
then investors could good business sense
progressed beyond a
exclude certain assets and because it
box-ticking exercise”
and resume their focus mitigates risk”
Martin Stanley of Macquarie
Infrastructure and Real Assets on on risk and returns”
how ESG has become critical for James Hall-Smith of InfraRed on how
infrastructure fund managers sustainability has become critical for
Frédéric Blanc-Brude of EDHECinfra on infrastructure investors
the need for better ESG metrics

84 Infrastructure Investor • November 2019

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