Governments may regulate and investors may mandate tighter requirements on what qualifies an infrastructure project as sustainability-grade, but ultimately organisational integrity will play the biggest role in the industry’s future.
This sentiment was shared by two guest speakers in the segment "Making infrastructure investing more sustainable" at the Infrastructure Investing Forum 2022 organised by AsianInvestor yesterday (Mar 8).
“Regulations certainly are a great driver of change and pushing through change and encouraging more sustainable practices,” said Krish Gandy, associate portfolio manager of infrastructure and real assets at Aware Super, a major Australian superannuation fund.
However, he added that as a shareholder and board member of investee companies, the fund must also engage with, and encourage, the management and operators of their assets to be more proactive in environmental, social, and governance (ESG) practices.
MEASURING THE IMPACT
“(It's important that) we think about how we measure the impact and how we put in the processes that take into consideration the carbon footprint or the broader societal environmental factors that are associated with a particular asset or the company,” he said.
Measuring electricity efficiency, measuring emissions reductions, monitoring the amount of agricultural waste that is reused or recycled, or monitoring the savings in water consumption were just some of the methods the fund uses to gauge the sustainability of their investments, he said.
“One of the key things we do is rewrite the KPIs … and then the management teams are evaluated against emission reduction charts, and targets such as sustainability initiatives or diversity requirements,” he said.
He said these performance indicators were just as important as hitting financial targets.
“If you have an annual process that's been forcing them to measure and present where they're tracking, it’s a nice way of encouraging this going forward,” he said.
A related issue raised during the panel discussion was the lack of data transparency, perceived to be prevalent in Asia where ESG investment is relatively new compared to the West.
“I think data transparency is one of the toughest challenges as sometimes you get data you're not sure of," said Hong Kong-based Shiuan Ting van Vuuren, chief investment officer of Sun Life, a wholly-owned subsidiary of the Sun Life Assurance Company of Canada.
This gives rise to difficulties on the ground for those who are involved in quantifying the impact of an investment, she said.
“So, when you calculate returns, are there certain things in the ESG role that you should take into account or anything that you used to take into account in the past that is no longer relevant?” she said.
Another common challenge was greenwashing, the marketing practice by which some companies inflate their environmental credentials.
Gandy said that although Aware Super is not an “ethical investment super fund,” it had a strong global reputation for authenticity and positive actions.
“Aside from certain sectors where we don't invest in such as coal mining, controversial weapons, or tobacco, our approach is just to be authentic and honest about the steps we’re taking in the companies and assets we are in,” he said, adding that the fund publishes a climate change analysis and transition plan that it updated regularly.
Taking a similar view, van Vuuren said integrity and organisational culture were important in tackling greenwashing.
“Ultimately, we are in control of our investment decisions. We need to make sure that we are comfortable with our process,” she said.
The two speakers agreed it was important for investors to “go down the supply chain” of the companies they have invested in to prevent undesirable third-party suppliers from becoming part of the end investment.
Despite the challenges, the trend in infrastructure investment as a new, sustainable asset class was gaining acceptance in Asia, they said.
“As a super fund, we're a long-term investor and so all aspects of sustainability are part of our investment-making decision process and I'd say for the better part of a decade, ESG has always been a key facet of our investment decision process,” said Gandy.
In this respect, he said renewable energy is an infrastructure asset class that would be a growing part of the fund’s portfolio. He also identified digital and smart technologies and the development of commercial hydrogen as an alternative energy – although still in the early stage of development – as new investment opportunities.
Other opportunities included green building, clean transportation, sustainable water management, and essential services such as hospitals, healthcare, and childcare.
What camo across clearly from both speaker was that financial returns and making a positive impact on the environment and society were not mutually exclusive.
“From our experience, we found the companies and the assets that have the strongest ESG credentials, tend to deliver more sustainable returns over the longer term. As a long-term investor, this is a key facet of our decision-making,” said Gandy.
This story has been edited to accurately reflect the date of the event which was held on Tuesday, March 8, 2022.