Navigating ESG in infrastructure investment: the key to a sustainable future

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Navigating ESG in infrastructure investment: the key to a sustainable future

Published: 6 Jun 2023 · Last updated: 15 Oct 2023

The infrastructure and renewable energy sectors play a pivotal role in facilitating the transition to a low-carbon economy and endorsing more sustainable practices. KEY ESG’s recent webinar on ESG in infrastructure outlines the unique challenges and opportunities posed by ESG in this sector. This blog will dive into the key themes in more detail.

ESG in infrastructure investment is in in the spotlight

Infrastructure projects, such as transportation systems, buildings, and water management, can have far-reaching effects on ecosystems, natural resources, and carbon emissions. As governing bodies, consumers and stakeholders are increasingly focussing on greenhouse gas (GHG) reduction and Net Zero targets, infrastructure and renewable energy sectors are coming into the spotlight.

Measuring ESG in infrastructure investment allows fund managers to assess their energy efficiency, carbon footprint, waste management, and biodiversity conservation. By tracking and disclosing ESG data, fund managers and companies can set targets, identify areas for improvement, and demonstrate their commitment to mitigating climate change and preserving natural resources.

In the wake of the pandemic, more and more G20 governments have released stimulus packages that position green and social infrastructure as integral elements of post-COVID plans. Initiatives such as the Bipartisan Infrastructure Deal in the United States, the European Union’s NextGenerationEU program, and the National Infrastructure Strategy in the United Kingdom all stress the importance of sustainability in aiding economic recovery.

In general, ESG is becoming an increasingly important consideration for all renewable energy companies and infrastructure investors; however, there are some unique challenges and opportunities that managers in infrastructure-related industries need to take into account.

So, how does ESG impact infrastructure investors and renewable energy portfolio managers in particular?

Green funding for infrastructure funds and renewable energy

For the last decade and a half, infrastructure and renewable energy investors have relied on funding granted on the basis of the fund’s environmental agenda. However, scrutiny around the legitimacy of ESG credentials and so-called “greenwashing” has become more prevalent in recent years, as companies have been exposed for having exaggerated their environmental focus. As a result, we’ve seen a growing demand for investors to support their environmental claims with audited and assured numerical data.

Limited Partners (LPs) and funding bodies now require proof and statistics to back up environmental claims and evidence a reduced carbon footprint. Investors look for clear ESG measurements that showcase progress, and fund managers need to ensure their ESG tracking protocols and strategies are efficient and up-to-date if they’d like to put forward a convincing bid for investment.

It's not enough to say that you’re working to mitigate your environmental impact. LPs want to see that you’re taking the necessary steps to reduce your emissions, recycle, use sustainable materials, and work more ethically. And they want to see the data progressing over time.

If investment isn’t an option, a firm might look to secure capital from a bank. Banks have their own green incentives, and investors are generally able to secure better interest rates or loan terms if they can produce good ESG evidence. Banks will also negotiate financial incentives for firms if they reach set targets by a certain date.

Complex asset considerations

Unlike other fund managers, infrastructure investors often have many different types of assets (wind farms, solar plants, buildings, energy storage etc.). These can be spread across different geographies, which often have different regulatory jurisdictions to adhere to. Infrastructure fund managers also tend to have several special purpose vehicles (SPVs) that the assets roll up into, presenting another challenge when it comes to monitoring ESG metrics. With so many factors at play, aggregating ESG data across an infrastructure investment portfolio can be time consuming and, in many cases, inaccurate.

Manual recording methods ultimately lead to estimates, and, as a result, asset insights within these kinds of portfolios can often be mere approximations, rather than accurate figures that provide data insights.

KEY ESG speaks to an increasing number of fund managers who are looking to quickly and easily collect and report data at an asset level for each different SPV or holding company. They want to assess sitewide impact over time and extrapolate insights from the data to make localised changes in specific areas. By monitoring ESG data down to a grassroots level, fund managers can identify easy improvements to make to their operations, which can result in a significant overall impact.

Evolving regulatory and carbon accounting landscape

The Sustainable Finance Disclosure Regulation (SFDR) was designed for public markets and pure play private equity (PE) and, as a result, many of the data metrics have been designed with public companies and funds rather than SPVs and infrastructure assets in mind. Translating SFDR to an infrastructure or energy transition portfolio therefore requires customization to ensure that the most meaningful and impactful data is being recorded.

As regulations relating to carbon accounting continue to evolve, these methods must remain flexible too. What we’ve found in discussions with funds and companies operating in this space is that Scope 1, 2 and 3 carbon accounting and reporting on financed emissions can feel overly complex. Infrastructure fund managers and renewable energy companies often adopt a step-by-step approach and begin with Scopes 1 and 2 before moving onto Scope 3 once the foundations of their ESG reporting strategy are established. Future-proofing your business for long-term carbon accounting success can be achieved with a suitable tech platform which allows for adjustment as business objectives and regulatory environments evolve.

Looking for more detail? Speak to one of our team

Navigating ESG for infrastructure fund managers and renewable energy companies presents unique challenges and opportunities. This blog has delved into a few of the specifics around fundraising, asset requirements and the regulatory environment. We speak to people operating in this space on a daily basis and can share our insights on how to succeed in the evolving ESG environment. To hear our in-house and external experts discuss some of the challenges first hand you can watch our infrastructure webinar or contact us.

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