Towards a Scientific Approach to ESG for Infrastructure Investors. A Publication of the EDHEC Infrastructure Institute

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Towards a Scientific Approach to ESG for Infrastructure Investors. A Publication of the EDHEC Infrastructure Institute

2 minutes
March 4, 2021 8:34 pm

New research finds that ESG reporting schemes for infrastructure investors are not focused on measuring risks despite upcoming SFDR requirements to do so.

A new publication of the EDHEC/Natixis Research Chair on ESG and infrastructure investment, “Towards a Scientific Approach to ESG for Infrastructure” reviews and maps major existing ESG schemes used by investors and finds that they are primarily designed to assess ‘impacts’ but much less to understand the ESG risks of infrastructure companies. The paper puts forward a roadmap to develop the investment knowledge necessary to manage infrastructure assets within the portfolio.

This research focuses on ESG and infrastructure from a pure financial perspective, in particular, the link between ESG, risk and asset prices. “A growing number of investors pursue ESG objectives to improve environmental and social outcomes directly, says Frederic Blanc-Brude, a co-author, and while this is important, ESG also remains a risk management and asset pricing question beyond the addition of constraints to the investments universe.”

“It was of the utmost importance to thoroughly document what exists on the market and analyze its strengths and weaknesses prior to designing new tools or approaches. This in-depth review of existing schemes has been very comprehensively achieved by EDHECinfra team” declared Anne-Christine Champion, Co-Head of Natixis’ Corporate Investment Banking.

To assess the link between ESG risks and infrastructure financial risk and asset prices, the authors conduct a review of 17 existing ESG reporting and assessment schemes used by infrastructure investors and create a mapping between 4,850 individual disclosures to determine to what extent these schemes can help answer financial questions within the portfolio.

They find that infrastructure ESG schemes exhibit considerable scope divergence (including the definition of infrastructure and ESG), measurement bias (including a tendency to use mostly qualitative measures), process and input indicator bias (as opposed to actual impact or risk measures) and, importantly, a bias towards measuring impacts (88% of all disclosures) and much less the risks to which infrastructure companies are exposed. “These schemes have created a rich set of indicators” says Nishtha Manocha, a co-author of the study, “these indicators are useful to evaluate ESG objectives including impacts but are not a system of knowledge designed to answer financial questions, including how ESG impacts can create risks.”

The paper predicts the rapid consolidation of ESG schemes for infrastructure because of the combined urgency of climate change and regulatory initiatives like the EU’s Sustainable Finance Disclosure Regulation (SFDR). “Beyond assessing impacts, which ESG reporting schemes currently focus on, prudential rules like SFRD will soon require integrating ESG-related financial risks, says Blanc-Brude, the director of EDHECinfra”. “This first publication robustly lays the foundations for the next phases of our research partnership, which is increasingly relevant and timely considering the regulatory agenda and momentum around recovery plans and build back better efforts across the world” added Champion.

The paper proposes concrete steps to develop science-based ESG reporting, including a taxonomy of the ESG risks and impacts of infrastructure companies, and materiality profiles for each type of infrastructure asset using objective, consensual, measurements that can be documented using artificial intelligence techniques.

The paper is available here.