Eight global institutional investor giants with US$1.5 trillion in assets under management have kicked off a ground-breaking initiative to standardize and advance the assessment of environmental, social and governance (ESG) factors in infrastructure investments. The founding investors have recruited GRESB, the organization that developed the global real estate benchmark now used by over 700 real estate funds, to manage and administer the survey. Together with Canadian supporters Alberta Investment Management Corporation (AIMCo) and Ontario Teachers’ Pension Plan (OTPP), Quinn & Partners had the privilege of attending the official launch of GRESB Infrastructure in London on September 7 and we provide a summary below of the key take-aways.
Founding members of GRESB Infrastructure
The winners: GRESB Infrastructure brings benefits to investors, investees and larger society
“With [infrastructure] asset lives spanning several decades, understanding ESG factors is critical to mitigating risk and maximizing returns,” explained Patrick Kanters, Managing Director of Real Estate and Infrastructure at APG Asset Management (Dutch pension plan with US$470 billion AUM). A standardized ESG benchmark allows investors to systematically assess risks, compare relative performance among current and prospective infrastructure holdings and engage fund managers and asset operators to improve performance. This is increasingly relevant because many long-term investors see infrastructure as an attractive asset class matching value appreciation with long-term liabilities, serving as a hedge against inflation and often providing predictable cash flows.
Identifying ESG risks or poor performance does not mean an investment will not be undertaken or withdrawn. Rather, the benchmark enables investors to have an informed conversation with managers and operators and mitigate, price or manage risks and opportunities. The end result is increased performance. “I am a believer in market forces,” says Nils Kok, CEO of GRESB, pointing to studies demonstrating links between financial performance and ESG performance in real estate. The GRESB real estate survey has been a very important tool in facilitating this analysis which in turn has been key to the benchmark’s success.
The GRESB survey benefits infrastructure fund managers, operators and assets as well. Having one standard will reduce the work of investees who often respond to different ESG questionnaires from multiple investors. One of the largest benefits will be the sharing of best practices within the same sector and portfolios. This is something that the founding members already have experienced success with and expect more of with increased scale.
Finally, this initiative seeks to increase investments in infrastructure while improving efficiency, social performance, and climate resiliency. As noted by one attendee, infrastructure is one asset class where increased sustainable investments almost certainly leads to significant societal benefits. This is reflected by the fact that increasing resilient infrastructure is one of the UN’s 17 Sustainable Development Goals.
How it works: The best of GRESB, tailored to infrastructure sectors
The infrastructure benchmark covers 8 aspects (shown below) and builds on the key strengths and learnings from 5 years of GRESB real estate progress. Similar to the GRESB real estate survey, the infrastructure tool assesses ESG at the organizational level using questions relating to management, due diligence practices, policy and disclosure and stakeholder engagement. It also addresses ESG at the sector and asset levels by looking at practices relating to sustainability benchmarking, monitoring, performance and engagement. The methodology enables an investor to compare portfolios comprised of different types of infrastructure assets.
GRESB Infrastructure – 8 survey aspects
The GRESB Infrastructure standard is aligned with and complements existing sustainability standards that are used by investors and asset operators such as PRI and GRI. Together, the instruments focus on a core set of questions that enables informed discussions and provides actionable benchmarking information, not just stand-alone reporting.
The survey is designed to be used by all types of infrastructure investors. Founding members include Aviva, which focuses on debt investment, PGGM and APG, which primarily invest in infrastructure funds as well as direct investors like OTPP and AIMCo. For each situation, the survey can be utilized to provide a benchmark of how ESG is being managed in the portfolio.
Next steps: Early mover advantage for infrastructure investors and operators coming on board in 2016
The GRESB Infrastructure survey will be open to submissions from global infrastructure investor and investee companies and funds in 2016, following a consultation period.
As with the GRESB real estate survey, it is expected that the infrastructure survey will evolve over time. Investors and investment managers who participate in the first year benefit from being able to influence the survey development and improve ESG practices ahead of GRESB standards becoming the basic expectation for investors.
As an example, APG, which seeks to increase its infrastructure portfolio by about 2% (US$9 billion) in the coming years, has made GRESB Infrastructure participation a requirement for all investments moving forward.