The opportunities for investors in responsible infrastructure debt are highly diverse, encompassing tangible assets in sectors such as transportation, hospitals, schools, utilities and telecoms.
While sustainable infrastructure investment is often associated with renewable energy, this is only one of the cornerstones of a responsible infrastructure debt portfolio. Investors seeking to diversify their infrastructure portfolio would do well to look beyond renewable energy assets and also consider the many other increasingly crucial environmental, social and governance (ESG) topics to find best-in-class investment opportunities.
Infrastructure debt is mostly private, meaning that little or no public data is available. While some projects are quite sizeable, most of the market is granular, with limited mandatory public disclosure or reporting. Aside from the Equator Principles – an environmental and social risk management framework widely adopted by banking institutions – there is a clear lack of standardisation for assessing and reporting on these projects. Given this reality, we have built our own dedicated approach to using ESG criteria in our infrastructure debt strategy.
Launched in 2017, our infrastructure debt platform focuses on financing tangible assets in sectors such as transportation, social infrastructure (universities, schools, hospitals), renewable energy (wind, solar), conventional energy and utilities (heating and gas networks, waste and water treatment) as well as telecommunications infrastructure.
Given the nature of these sectors, we believe infrastructure debt can certainly support the financing of climate-related challenges. As an asset manager, we see an opportunity here to build an investment portfolio of assets that are the most positive in terms of ESG, drawing on BNPP AM’s 17-year history in sustainability-related investing as well as the expertise of our dedicated Sustainability Centre.
The building blocks of responsible infrastructure investing
Our starting point is a taxonomy of green infrastructure assets which we have developed internally using the works from the Climate Bonds Initiative for green bonds or for the French TEEC label. Each investment is assessed by the Sustainability Centre. Given the limited information generally available to private debt lenders, additional questions will need to be answered. As an example, on researching a solar energy company, we asked the sponsor to provide information on the measures, standards and guarantees in place to ensure proper protection of biodiversity at the project level.
While the current competitive market dynamics are such that we cannot force a borrower to provide full disclosure on an infrastructure project, the good news is that we have yet to hit a roadblock: we have found that borrowers are happy to provide details to alleviate any ESG concerns.
Looking more closely and selectively
To strengthen our commitment to sustainable infrastructure and add key performance indicators to our portfolios, we go a stage further: with the help of a specialist consultancy, we assess the environmental and climate impact of each of our loan investments. The impact of each loan is quantified in terms of carbon footprint, 2°C path alignment, avoided emissions and net environmental contribution vs. benchmark assets. This assessment, along with the analysis by the Sustainability Centre, forms the annual ESG report for our investors.
As a responsible investor, we engage only with companies and projects that share our belief in integrating ESG factors into our investment decisions. Still, there is a world of opportunities. Projects that are at the crossroads of information technology and traditional infrastructure – energy in particular – could be especially relevant: from batteries and ‘smart everything’ (meters, grids, cities, roads, etc.) to the infrastructure needed for increased data storage, processing and transmission. These could all be part of a sustainable, greener, infrastructure debt portfolio.
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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.