It just makes sense for the industry to embrace environmental, social and governance factors in infrastructure investment
Infrastructure projects help to improve our lives, whether that’s rail, roads, buildings, power plants, utility networks or data centres.
The development of infrastructure enables us to travel, communicate, socialise and explore, helping to shape our world. As such, it makes perfect sense for the industry to embrace consideration of environmental, social and governance (ESG) factors as part of infrastructure investment or debt financing.
Industry has an opportunity to embrace its fundamental purpose – to benefit society – while continuing to deliver on its bottom line
It is gradually becoming accepted that considering ESG factors during an investment has a positive effect on long-term returns. Strong ESG management can be a leading indicator of strong financial management and can contribute to a more sustainable future. By embracing ESG, the industry can align with the relevant United Nations sustainable development goals (SDGs) while delivering strong returns.
The SDG that is most specific to infrastructure is SDG 9: industry, innovation and infrastructure, but almost all others can be applied to the sector. Taking data centres as an example, SDG 9 is applicable to technology companies being motivated by economic incentives (particularly local and regional tax breaks or incentive packages) and relying on a skilled workforce and infrastructure (such as wireless networks, utilities, roads and schools) to support their facilities and that workforce.
While they do not employ as many people as traditional manufacturing firms do, technology companies can still contribute to a region’s economic growth. Several communities in the US have even developed designated data centre land-use zones to encourage companies to locate their facilities there.
Furthermore, data centres are increasingly sensitive to the effects of climate change, due to the importance of power reliability to their business model.
Extreme temperatures mean increased cooling requirements, which in turn increases energy usage and cost. Extreme weather means increased risk of power outages and downtime, thereby increasing reliance on backup generators, which, in turn, increases emissions.
Also relevant to infrastructure is SDG 12: responsible consumption and production. Access to low-cost, reliable power is often one of the top determinants for data centre location. Tech companies are under increasing pressure from shareholders, non-governmental organisation (NGOs) and local communities, resulting in a commitment to increase their use of renewable energy. Once you start looking into it, it becomes clear that data centre projects include elements that relate to nearly all SDGs.
Many infrastructure investors already see ESG as being interwoven with their operations. Weak ESG performance, particularly on the social side, can adversely affect public and regulatory acceptance of projects, including new developments and expansions. For example, poor community engagement can result in opposition that delays or halts the permitting process. Since infrastructure is such a resource-intensive sector, improved ESG and supply chain management can have a direct bearing on operational costs.
The rise in ESG focus in the infrastructure sector is demonstrated through the ever-increasing number of infrastructure investors looking for a consistent ESG benchmarking tool. Since GRESB Infrastructure Assessment (an annual survey designed to systematically assess, score and benchmark the sustainability performance of infrastructure investments) was introduced in 2014, ESG assessment has increased rapidly. More than 500 infrastructure funds and assets participated in the scheme in 2019, which represents a striking 41% year-on-year increase. The largest group of participants works within the energy sector, particularly renewables, followed by transportation. Further down are participants with activities ranging from social infrastructure (such as care homes) and telecommunications, water management and waste.
The industry has an opportunity to embrace its fundamental purpose – to benefit society – while continuing to deliver on its bottom line. By aligning itself with SDGs, and better understanding project impacts on ESG factors, the industry can move with the times and help develop a sustainable future in a changing climate. Not only will this make a good business case, but increasingly it will also become a necessity to meet regulations, as well as to ensure commercial success.
Aga Siemiginowska is managing consultant at Ramboll Group, and Tomas Sys is principal consultant at Ramboll Group