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Green infrastructure investment needs one ESG standard

Photo by Markus Winkler on Unsplash
Photo by Markus Winkler on Unsplash

Guggenheim Investments and WWF surveyed the collection, reporting and use of ESG data in infrastructure projects and found that the sector wants standardised and simplified standards to drive capital flow.

What: Guggenheim Investments and WWF have released analysis of a survey on the collection, reporting and use of ESG data in the infrastructure.

Why it matters: Infrastructure projects need to tap into green capital flows. Infrastructure is an increasingly important asset class for institutional investors but confusion about what and how to report remains.

What next: Governments and regulators are going to have to play a role in achieving standardisation and certainty for the market.

The report, “Testing Industry Attitudes Toward a Common Reporting Approach for ESG Data Use in Infrastructure Investment,” surveyed both ESG data users and data preparers to explore whether an industry-wide standard approach to measuring ESG in infrastructure investment is desired and how this might be achieved.

Infrastructure’s critical role in achieving SDGs

Infrastructure is going to play a critical role in whether or not the goals of the Paris Agreement and the Sustainable Development Goals (SDGs) are achieved. A 2021 report titled Infrastructure for climate action from UNOPS, UNEP and the University of Oxford said that infrastructure is responsible for 79% of all greenhouse gas emissions and 88% of all adaptation costs. The research looked in detail at the influence of infrastructure on climate action across energy, transport, water, solid waste, digital communications and buildings sectors.

According to the authors of the ESG survey: “If infrastructure projects could clearly outline compelling financial return propositions and ecosystem benefits, they could tap into the institutional capital they need to achieve the United Nations Sustainable Development Goals, facilitate the growth of developing countries, and upgrade the existing stock of aging capital assets around the world.”

Universal set of standards needed

Analysis showed that ESG data users and data preparers see value in convergence on an industry-tailored set of metrics for ESG data, but with almost 40 different frameworks currently in use by respondents, there is significant divergence in the application of current ESG standards.

Outcomes from the survey suggest that the key to unlocking this capital is an agreed-upon set of standards that would certify a project as sustainable, allowing investors and developers to recognize a set of consistent methodologies and metrics for measuring and demonstrating a project’s sustainability.

At the same time, it was clear that there are two core mechanisms for mainstreaming ESG into infrastructure investment, and that is a combination of regulation mandating ESG disclosure and pressure from investors and lenders. Deal agreements are going to need to require ESG data and performance to provide sufficient pressure – and getting one set of standards is going to make that easier.

In a joint letter accompanying the report, Scott Minerd, chairman of Guggenheim Investments and Guggenheim Partners global chief investment officer, and Carter Roberts, president and chief executive of WWF, wrote: “We agree with the authors of this report, who conclude that ‘the time for action is now.’ Trends in climate change and the COVID-19 crisis have led to an awakening in the finance sector of its roles and responsibilities in securing a healthy and stable planet and global economy.”

Collaboration and engagement across the market is fundamental

The problems that the infrastructure sector finds with the current state of play in ESG are similar to those in every sector:

  • Lack of standardization and consistency in approach
  • Too many frameworks (and different stakeholders using different frameworks that yield varied results)
  • Lack of industry specific reporting standards
  • Difficulty accessing necessary data
  • Stakeholders operating at different scales (i.e., portfolio vs single asset)
  • The inability to capture financial impacts of infrastructure projects on national, regional, or local scales very well

While there is widespread agreement that one set of standards would be useful, it only takes one look at the current tension between ISSB and EFRAG standards for publicly listed equity to realise what a challenge this can be.  What is perhaps more interesting is the perspective that both data users and those that prepare ESG data need to think differently about ESG.

Across the board there seems to be a lack of engagement between those who are responsible for preparing ESG data and those who are using it to make investment decisions.  Of course everyone agrees that there needs to be an improvement in how we measure and communicate ESG factors, but there is little agreement on anything beyond the fact that simplification and standardisation would be appreciated.

There is little question that greater collaboration and engagement between those operating in different parts of the market will be required for the development and application of unified, industry-relevant metrics. The question that remains is how we get there.

The report was conducted by KPMG Advisory N.V. and Mott MacDonald and surveyed both ESG data users and data preparers to explore whether an industrywide standard approach to measuring ESG in infrastructure investment is desired and how this might be achieved.

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