Environmental, Social, and Governance (ESG) investing is getting popular in infrastructure financing as infrastructure reports indicated the climate risks and investment gap. The ESG continues to attract investors, which is great for declining investment. Let’s understand how this investing framework works for infrastructure.
ESG Investing in Infrastructure
The 2024 Global Infrastructure ESG Report states that ESG funds have attracted $106.74 billion despite the decline of 20% in private infrastructure financing, highlighting the ESG potential. The ESG issues in the infrastructure continue to grow, affecting the growth of the sector.
The infrastructure is a liquid asset class held for the long term, hence it is vulnerable to climate, sustainability, and long-term risks affecting its performance. With the growing demand for infrastructure, it’s important to mitigate the investment risks and climate risks.
ESG investors make sure that their investments have a good effect on society, the environment, and the standard of governance, while seeking financial gains. This solves the ESG issues in the infrastructure and simplifies the complexity of the sector.
The ESG-focused investing in infrastructure continues to grow worldwide, and the US has the largest fund managers at 35% of funds, where the UK is on the table with 18%, followed by other European markets.
What are the principles of ESG?
To understand ESG investing and its focus, you would need to understand the core principles, such as:
- Environmental:
- It focuses on the company’s impact on the environment and its resources, and promotes conservation and protecting nature practices. The companies with high ESG scores are those that reduce their carbon footprints, commit to sustainable change, embrace renewable energies, and promote green energy.
- Social:
- The Social part of the ESG focuses on the infrastructure development that considers society’s needs, and manages a great relationship with customers, communities, and follows the labour standards.
- Governance:
- The governance component of the ESG ensures accountability and compliance with laws and regulations. This ensures transparency, reduction of corruption, and ethical business practices.
- Strong governance is what is needed to ensure that the infrastructure development follows the ESG government practices for better sustainable practices.
How does ESG investing work in infrastructure?
The ESG investing follows the core principles and ensures it is followed through every stage of the project in the following way:
- The investors in the infrastructure project that follows the ESG components and meet the goals.
- The project should be planned to be sustainable, reduce climate risk, use green materials, follow the workers’ safety standards and ethical practices, and operate towards energy efficiency.
- The financing is often done through green bonds, multilateral support from the development banks, or public-private partnerships.
- The project generally develops the ESG management system to ensure every stage of the project follows the core principles of ESG investing.
What drives ESG Investing in Infrastructure?
The public and private finances are not enough for the long-term scaling of infrastructure development, as the sector is dealing with investment gaps. The ESG financing comes into the picture; let’s see what drives the ESG investing in infrastructure:
- Sustainability and climate risks focused: With the extreme weather events increasing over the years, infrastructure development must be focused on climate risks and sustainable practices to reduce the climate impact and ensure the infrastructure lasts longer. With the ESG financing, this has become the main focus for the investment and promotes such projects.
- Community Engagement: The ESG investing ensures the local communities and other stakeholders related to the project are engaged through the project development to ensure they address their concerns and needs.
- Safety and Health standards: The ESG investing ensures that the project development follows all the standards related to the health and safety of the employees, workers, and labourers.
- Conservation: The ESG investing ensures the project implements the measures to protect the biodiversity, materials that do not affect the environment, and ensures the local habitat is not affected.
- Reducing the Climate risks: The world reports say almost 50% to 70% greenhouse emissions happen through infrastructure, so following the ESG factors, we can reduce the emissions.
- Attracting Investors: With the market trends towards eco-friendly practices, companies can easily attract and raise capital for infrastructure projects that focus on the ESG factors.
The ESG financing in infrastructure ensures that the nature of the project is eco-friendly, where all aspects are focused and considering the needs of today’s infrastructure, it’s important to follow them not only for bagging great investment but for the better future.
