Data & Intelligence

ESG in Infrastructure

This brief draws upon engagement with the EMPEA Energy & Infrastructure Council. Members of the Council recognize both the importance and nuanced nature ESG issues have in infrastructure investing in emerging markets. This brief is designed to help articulate those nuances and help support practitioners understanding of ESG in the space.

In infrastructure investing environmental, social and governance (ESG) issues remain critical considerations for practitioners given the longterm time horizon and often relatively significant financial investment required. During the first half of 2016 US$1.8 billion of capital was invested in infrastructure and real assets in emerging markets. ESG considerations and best practices evolve as capital is continually raised and deployed across the asset class. Relative to other asset classes such as private equity, infrastructure investing is comprised of a complex and nuanced mix of ESG factors including land acquisition, resettlement, community engagement and environmental impact. These complexities are revealed in the industry standards & guidelines and the types of risks, considerations and priorities that influence a firms ESG management system for infrastructure investing.

Industry Standards and Guidelines

Industry standards and guidelines are often the foundation for investors ESG management systems in infrastructure investing. The World Bank Group EHS Guidelines & Industry Sector Guidelines, the IFC Performance Standards, Equator Principles, PRI Principles, CDC Toolkit and Infrastructure Sector Profile are commonly cited references. The World Bank Group Environmental, Health, and Safety (EHS) Guidelines and the Industry Sector Guidelines are technical reference documents which can be tailored to risks and contexts of specific projects, including varying local regulations. Included in the EHS Guidelines are performance levels and measures that are typically accepted by IFC and believed to be realistic in” new facilities by existing technology at reasonable costs.” The IFC Performance Standards also provide a framework to manage environmental and social risks. As a risk management framework, the Equator Principles (EPs) provide a base standard to support responsible decision making. EPs are designed to be applied globally and across industries. The Principles for Responsible Investment (PRI) are six principles developed by global institutional investors to reflect the current ESG issues related to investments. CDC’s ESG Toolkit for Fund Managers is a comprehensive reference guide for ESG related issues. There is a specific section dedicated specifically, to helping Fund Managers (GPs) develop a tailored ESG management strategy. In addition, GPs will benefit from the toolkit’s infrastructure profile which is part of the guide’s sector profiles. For practitioners active specifically in the energy sector, the Actis Energy Impact Model is a comprehensive tool that can be easily adapted.

Maximizing the value of these standards and guidelines requires practitioners to tailor and customize them to align with the context of their infrastructure investment. Paul Winters, Managing Director, Chief Compliance Office and General Counsel for Denham Capital explains, “The operating environment is key. For each infrastructure project we incorporate and align the current operating environment context into our ESG strategy.” Part of the operating environment also involves integrating local regulations and standards as well as individual ESG guidelines that institutional investors may have. Institutional investors will typically outline their ESG best practices, guidelines and procedures through legal commitments including LPA and side letters.

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EMPEA has served as a useful reference platform for CDPQ by helping to define the eligible universe of fund managers in growth markets. Membership provides background data and a...

Rashad Kaldany | Executive Vice-President and Growth Markets, CDPQ

The developed markets have no equivalent to the role EMPEA is playing as a convener and source of trusted information in the emerging markets.

David Rubenstein | Co-Founder and Managing Director, The Carlyle Group