Insufficient integration of ESG metrics in valuation of infrastructure investments

Posted on March, 18 2019

Private investors could do more to improve the integration of environmental, social and governance (ESG) considerations into infrastructure investment processes.
Urgent action is needed to ensure that expected infrastructure investment of up to $94 trillion by 2040 is made in line with global sustainability agendas, such as the UN Sustainable Development Goals (SDGs).

The new report, 'Valuing Sustainability in Infrastructure Investments: Market Status, Barriers and Opportunities' by WWF and Cadmus, explored the currently low level of ESG integration and evaluated emerging publicly available tools that seek to make sustainability impacts of infrastructure projects tangible for investors.

While there was consensus on the importance of ESG integration in infrastructure, the actual adoption of third-party ESG tools has been limited.

“Most infrastructure investors are only at the beginning of this learning journey and have yet to make use of the specific tools that are being developed to support them.” Josef Bieri, Advisory Partner at Partners Group.

Figure: ESG Risks and Benefits – Impacts on vs. Impacts from of a Hypothetical Road Project

Based on interviews with investors, the study made the following conclusions:
  • Investors confirm ESG criteria can help manage risks and improve financial returns of infrastructure projects
  • ESG investment analyses typically fall into one of two categories: (i) Generally assessing the ESG performance of an asset (evaluation); and/or (ii) Quantifying ESG metrics in a way that can be integrated into a financial model (valuation)
  • ESG evaluation has been increasingly adopted by investors to (i) guide engagement with asset managers, to (ii) enhance internal investment decision making processes and to (iii) improve reporting on asset performance
  • Investors have less readily adopted ESG valuation tools due to (i) the heterogeneity of the infrastructure landscape; (ii) the quality and availability of data; (iii) the ability to quantify and monetize ESG criteria; (iv) transparency in valuation methodologies across the industry; (v) client confidence in ESG valuation; and (vi) the costs of ESG analysis.

To increase the uptake of ESG tools as well as our understanding of how sustainability considerations influence financial viability and general attractiveness of an infrastructure asset, investors, tool providers, governments and other stakeholders should:
  1. Develop open data sets and research tying ESG criteria to financial outcomes
  2. Tailor ESG tools for specific infrastructure sub-sectors
  3. Increase market awareness of tools via competitions
  4. Align existing evaluation and valuation tools
  5. Tailor ESG tools to the needs of the investment community
  6. Implement policies requiring ESG disclosure

To address the first barrier, WWF together with B Capital Partners, explored how consideration of ESG factors may influence forecasting of financials (such as revenues, operating costs and capital expenditure), which in turn are the basis of financial models and ultimately of asset valuations, be it for annual reports or for an acquisition or divestment.

A forthcoming Guidance Note on Integrating ESG factors into financial models for infrastructure investments selects twelve ESG factors and identifies their potential risks and opportunities for infrastructure and how they can be quantified for the purposes of a financial model.

Further information:
Laura Canas da Costa, Senior Advisor Sustainable Finance, WWF Switzerland
T: +41 44 297 22 66
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