The inaugural Global Real Estate Sustainability Benchmark (GRESB) assessment for infrastructure reveals that the asset class generally lags real estate’s offerings of environmental, social and governance (ESG) evidence for investors. Results show a higher degree of commitment at the fund management level, while measuring and reporting the environmental performance of individual facilities is less common. This is expressed in divergent average scores for the two separate but complementary streams — funds and assets — reporting via the benchmark.
Alberta Investment Management Corporation and Ontario Teachers’ Pension Plan are among 10 founding members of the GRESB infrastructure benchmark. The group, comprised of some of the world’s largest pension funds and fund managers, approached the metric developers in 2014 with an eye to tapping into GRESB’s established and steadily gaining endorsement from institutional investors. Many of the first-year respondents also participate in the real estate survey, which was launched in 2009.
“The GRESB infrastructure assessment has been embraced by almost 200 infrastructure assets and funds,” reports Nils Kok, GRESB’s chief executive officer, in the introduction to the October release of the 2016 results. “The new assessment provides unprecedented transparency for investors to make more informed decisions, and infrastructure companies and funds to improve their ESG performance.”
The 51 participating infrastructure funds achieved an average score of 54, derived from 10 indicators focused on the ESG policy, risk assessment, analytics and disclosure embedded in investment criteria and protocol. Drilling down, an average score of 28 for individual assets somewhat camouflages the range of performance among the 134 participating entities in 53 countries.
This includes assets held by 23 of the funds also reporting fund-level ESG actions, and covers a broad range of asset types — renewable and conventional power generating facilities, airports, ports, toll roads, energy transmission and distribution, telecommunications, water and waste facilities and social infrastructure — with differing degrees of environmental impact.
Similar to the scoring system for real estate, infrastructure scores are derived from 32 indicators across eight differently weighted aspects of sustainability. Assets are scrutinized for explicit ESG policies, risk assessment and mitigation measures, and actual performance in six categories: energy; GHG emissions; waste; water; air pollutant emissions; and biodiversity and habitat protection.
Also similar to real estate, the 21 participating infrastructure assets in Australia and New Zealand topped the field with an average score of 35. Europe’s larger share of 73 infrastructure assets collectively scored 26 to under-perform the global average, while 38 North American assets were in sync with the global average, achieving an average score of 28.
Results highlight some areas of weakness. Notably, the report advises that funds could improve disclosure practices, including backing up ESG performance reporting with third-party validation. At the asset level, the report notes that actual measurement and reporting of performance indicators “is still in its infancy” and that biodiversity and habitat protection particularly tends to be overlooked.
On the plus side, overall performance at the fund level was deemed “strong” and there is broad recognition of environmental risks and the need for risk assessment, management and mitigation.
“Interestingly, while 81 per cent of assets reporting to GRESB have formally adopted a policy or policies on environmental issues, even more (94 per cent) conduct environmental assessments. This shows that even some assets that have not formally adopted policies on environmental issues, in practice, take these into account,” the report states.
GRESB proponents suggest risk management is at the core of the metric’s appeal to investors and the capital market at large given the multi-decade or even multi-generational lifespan of infrastructure assets. Plus, as real estate is already experiencing, benchmarking for sustainability is simply in line with the evolution of the economy.
“The development and operation of infrastructure projects will play an important role in achieving the ambitious carbon reduction goals set out by the COP 21 agreement in Paris,” observes Emke Bus, GRESB’s managing director, ESG and infrastructure. “The involvement and engagement of institutional investors such as banks, insurance companies, pension funds and sovereign wealth funds in infrastructure investments that are low-carbon, climate resilient and socially inclusive is particularly important.”