A new infrastructure sustainability benchmark has been developed by a group of eight institutional investors, alongside GRESB, to enable systematic evaluation and industry benchmarking of the sustainability performance of their infrastructure assets.
Despite large and widespread allocations by Canadian and Australian pension funds to infrastructure, institutional investors globally do not have large allocations to the asset class.
According to CEM Benchmarking, 28 per cent of pension funds now invest in infrastructure, and allocations are still low at around 0.8 per cent on average, however this will increase.
An initial group of investors, which includes CalPERS, APG, ATP and Ontario Teachers Pension Plan and PGGM, did a pilot assessment of ESG benchmarking within their infrastructure investments with an assessment they developed together.
Infrastructure managers, and operators gave them feedback and now GRESB has become involved in order to professionalise the benchmark and ensure a standardised global approach.
GRESB has been conducting a sustainability benchmark for the real estate industry since 2009,where it captures more than 50 data points of environmental and social performance integrated into the business practices of each real-estate company or fund.
Nils Kok, chief executive and founder of GRESB says the development of ne consistent global index is important.
GRESB has a team of 20 people that will frame the ESG criteria and collect data.
“We have a very strong connection with the industry and a framework for indicators to take feedback and views. The industry doesn’t always align, and investors may not look at all indicators we believe are material, GRESB as a conduit is very well positioned. Interaction with the industry is very important,” he says. “We have inhouse knowledge and can turn it into assessment and systematically collect and validate information and produce standardised output.”
The real estate benchmark uses regional groups and benchmark committees to help collect data, discuss trends and get industry feedback with specific working groups on specific issues. This means the benchmark and assessment can be continuously updated in a predicable manner.
The infrastructure concept has only just been released but will adopt a similar structure and collection process, with the first data collection period in the first quarter 2016.
The real estate benchmark took about five or six years to develop and the infrastructure benchmark is expected to be a similar time frame. Ultimately a score card will be produced to investors and to managers.
“This is a heads up to the sector to say it’s coming,” he says. “The infrastructure industry is ready for this conversation, they are more aware of their role in society and obligations that brings. The industry is ready for standardised reporting on ESG, the pushback is less than in real estate.”
Kok says the long-term nature of these investments means it is ripe for ESG analysis.
“This is overdue, if you make a commitment for 30 years it is important how you play into that. It is almost amazing this hasn’t happened before. I believe it will rapidly be standard practice and lead to better practice in risks.”
Kok, who is also an Associate Professor in Finance at Maastricht University, says investors are interested in infrastructure and allocations will increase.
“There’s a need for information and better understanding of what is being invested and with whom. The need for information is significant,” he says. “Investors making allocations and are saying we’ve been successful in ESG in other parts of the portfolio, infrastructure is next and obvious. It is long term and there are significant environmental, social and governance impacts they have.”
GRESB has a number of generic indicators in every ESG ranking, no matter whether it is in real estate, financial services, infrastrucuture, or oil and gas.
“There are indicators that can be applied and relevant if it is a North Sea windmill or sea port. Things like how an operator runs a business its environmental policies, bribery and competition, sustainability integration, reporting on ESG metrics, stakeholder communications.”
The institutional investors that are committed to using the data will be involved in the development of the benchmark. GRESB will look at their subsets and choose layers on their allocations.
“Investors are driving the benchmark, important they drive it and that there is collaboration with the industry They don’t’ have operational experience so we need to work with the industry. Investors need to reach out to operators and work with us on this ESG benchmark.”
The data collection will also look at sub sectors, for example within utiliites, classify renewables as a subsector.
“Infrartucture investments span the globe and fit the requirements of institutional industry, they have long time horizons and predictable cashflows. As the allocations to infrastructure increase, for ESG to be part of that from the beginning is fantastic.”
According to a statement by OTPP, infrastructure and sustainability are closely related: as the backbone of the global economy, infrastructure investments offer scalable, resilient pathways to sustainable economic growth by delivering key societal benefits, such as vital transportation links, (renewable) energy sources, livability, social infrastructure, water and waste management systems, smart grids and low-carbon transportation systems.
“Given the long-term horizon and the societal impact of infrastructure investment, sustainability and broader environmental, social and governance considerations are critically important for infrastructure investors. Therefore we join forces in setting up a global benchmark that provides insight, allows us to measure the progress and gives us the means to engage with our investee funds and companies,” says Patrick Kanters, Managing Director, Global Real Estate and Infrastructure, APG Asset Management.
