By Philippe Zaouati
Infrastructure is very much on the up. With 200 projects on the UK slate alone, according to the government’s ambitious 2013 Infrastructure Plan, the EIB’s Project Bond Initiative 2020 and strong demand for long-term yields that combine stability and return, it is high time we looked at how sustainable infrastructure financing can rhyme with value-added in more ways than one – provided it’s done right.
But just what is sustainable infrastructure financing? What sustainability and infrastructure have in common is that both are essential to the very fabric of society and have extended timelines. Sustainable investments aim to create or maintain environments that promote long-term economic development and wellbeing. Infrastructure, which provides material support for essential services, has to last for decades – well outliving financing deals. Such projects are also, by definition, tied to local development and to social needs, while likely to carry potentially substantial environmental, economic and social impacts. Because all key decisions are made before projects are built – or even funded – risks need to be identified early.
Private involvement in infrastructure, especially those much-reviled public private partnerships (PPP), may conjure the spectres of cost-cutting and end-user price increases (but what people forget is that PPP costs reflect services rendered, such as maintenance and renewal). But, adopting a sustainable approach to infrastructure investments can have positive repercussions on the environmental, social and economic performance of the projects that are eventually built.
Sustainability also increases the desirability of infrastructure investment vehicles, whether these be PPP, infrastructure financing funds or bonds, because the upstream establishment of clear, quantifiable environmental and social goals increases transparency throughout each phase of a project.
In fact, one of the strongest arguments for sustainable infrastructure isn’t green at all, but rather economic. For investors, SRI risks are genuine, and they’re rising fast. Building an office block without planning for more stringent energy regulations or employs carbon-intensive materials may just find its asset has depreciated considerably more than expected in five or 10 years. Fund managers tendering for a project whose approach is non-sustainable may find that a cornerstone institutional investor is reluctant to participate. A delay due to biodiversity concerns discovered late can cripple the return of an equity stake in such a project.
The key to creating a workable methodology for infrastructure projects is to adopt an SRI perspective from day one rather than overlaying it at the end of an investment process, and to consider the entire lifetime: construction, operation and dismantlement phases. It also needs to anticipate lifestyle changes that affect infrastructure, such as increased communication needs. This lifecycle approach may raise initial construction costs, but can substantially bring down the longer-term cost of maintenance as well as avoiding onerous mistakes. Lastly, meaningful sustainability analysis allows investors to know exactly where their financial contribution is taking the real economy.
Supported by a strong ESG methodology, SRI becomes more than a risk parameter: it serves as a tool for identifying and improving new infrastructure opportunities. Whether the project is a solar park, a wind farm, a hospital or even a motorway, best practices like exposing and avoiding potential biodiversity risks, employing local SMEs, minimising pollution and nuisance during both construction and operation or planning for recycling promote two critical concerns without which no infrastructure functions effectively: local good-will and avoidance of unplanned expenses.
Nevertheless, arguments in favour of sustainable infrastructure are not universally accepted. The extremely long-term nature of the concept leads some investors to believe they may suffer underperformance nearer to hand. However, when risks are appropriately weighted they contribute to sustainable yield and offer portfolio diversification. Rationally speaking, lower long-term risk should increase attractiveness now as well as later.
An elegant symmetry between the long investment horizon inherent to retirement savings and the long-term benefits of a sustainable approach for investors, infrastructure users, society and the environment merely reinforce how much sustainable infrastructure investment instruments can contribute to durable portfolio construction.
Philippe Zaouati is chief executive at Mirova
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