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Sustainable investing and the millennial investor
INSTITUTIONAL, corporate and retail investors are growing more socially-conscious as companies grapple with rising energy costs and governments impose carbon taxes to be environmentally responsible. This is especially true in the area of infrastructure, as big infrastructure projects can have significant environmental and social impact.
In Asia, there is huge demand for infrastructure investment driven by key trends including demographic change, urbanisation, increased labour and capital movement, and growth in world trade. These drivers of demand for infrastructure spending are combined with historical under-investment by governments and private sector companies, which has resulted in a large infrastructure gap.
As an example, the Asian Development Bank (ADB) estimates that developing Asia will need to invest US$26 trillion from 2016 to 2030 on infrastructure to maintain the current growth rate. At US$1.7 trillion per year, this is a huge challenge and one that cannot be addressed by governments doing "more of the same".
In addition to these trends, rapid economic growth and its overarching impact on the world's climate and weather patterns, has led to a corresponding global emphasis on sustainable development. This has contributed to the demand for sustainable infrastructure in the region.
For instance, of the 17 Sustainable Development Goals (SDGs) adopted by world leaders during the September 2015 United Nations Sustainable Development Summit, Goal 7 speaks of ensuring "access to affordable, reliable, sustainable and modern energy for all". Clean energy is only one aspect of the demand for sustainable infrastructure though. There is also demand for climate resilient infrastructure in urban transportation, agriculture, flood defence, communications and healthcare provision to name but a few.
Both retail and institutional investors are allocating more of their portfolios to sustainable or responsible investing. While there are many different definitions of what sustainable or responsible investing is, very broadly it could be defined as investment that gives consideration to additional factors above the traditional factors such as asset type, geographical location, risk and return profile and management track record.
Additional factors would include the environmental (in terms of pollution, congestion, use of scarce resources of the company project), and social (in terms of addressing poverty, supporting local communities, providing employment and training opportunities.)
In addition, there are further factors that could be seen to be falling under the "sustainable investing" umbrella in recent years, such as the gender pay gap, tax avoidance, restrictive labour practices/modern slavery, and privacy and data security. This increasing consideration to these environmental, social and other factors is especially true for millennial investors who want to see their savings and investments having a positive impact on communities and the environment.
Infrastructure development and sustainable investing impact governments and pose challenges for infrastructure companies and financial investors. The key challenge is that in order to secure financing for infrastructure projects, more consideration must be given to these issues in the upfront project planning and development phase.
If this is not done, it will not be possible to deliver the much-needed infrastructure, especially in countries in the region where governments' fiscal resources are limited and private sector financing is required.
For example, when deciding on a country's power generation plan, if it is reliant on coal-fired power generation, that would exclude a large pool of private capital from investing in the proposed power plants as a large number of institutional investors have an investment mandate to only invest in clean and renewable power generation projects.
Similarly, when taking a new road project, if the government delivery agency or the private sector road developer have not incorporated the Equator Principles - a risk management framework adopted by financial institutions for determining, assessing and managing environmental and social risk in project finance - then there would again be a large pool of potential capital that they cannot access to finance their project.
To address this, there would need to be sufficient focus on environmental and social factors such as the environmental impact assessment, resettlement plan for displaced people and the chosen construction methodology. Further, there needs to be an effective framework implemented to monitor performance against these factors and address any weaknesses in implementation.
In order to allow investors that have investment mandates that are centered on sustainable investments to invest in infrastructure projects, governments and infrastructure companies are structuring products and projects to cater for these sources of finance.
There is a big effort on multiple fronts to develop green project bonds as a more mainstream financial product. Green project bonds are bonds that are tied to a specific project that has positive social or environmental outcomes, like a solar park.
The ADB has supported a US$225 million climate bond linked to geothermal project in the Philippines. The Singapore government has announced that it is looking to develop green bonds. These could be issued in the coming years by a government agency like the National Environment Agency or the Housing Development Board and be linked to climate resilient infrastructure.
It is expected that the amount of capital that is mandated as sustainable will only increase. Governments and infrastructure developers that require private sector financing will have to respond to this and develop projects and products to enable to them to secure financing for ambitious infrastructure investment programmes.
The writer is Capital Projects & Infrastructure Director at PwC Singapore. Views expressed are his own.