With ESG in demand, can infrastructure boost its social measures?

The widespread recognition by infrastructure fund managers, lenders and investors of the importance of ESG principles – the environmental, social and governance risk criteria investors use to screen potential investments and assess their long-term value – appears only to have strengthened since the global pandemic. The distinct shift continues, from useful consideration to future-focused must-have.

If we want to fully unlock the inclusive potential of major infrastructure projects and position them to best attract that investment, well-designed public policy can guide private sector delivery partners to demonstrate inclusivity targets and KPIs right at the project level.

ESG remains a priority for investors post-COVID

When Infrastructure Investor recently summed up the biggest annual developments in the infrastructure asset class over the last 10 years, one crucial standout closed the decade. It was the ‘growing importance of ESG principles in infrastructure investing and specifically in getting the elusive ‘S’ right’ to ensure value-creating investments over the long term. Greater gender diversity was singled out as an increasing expectation for asset managers and enterprises that get funded. They went on to implore that ‘as owners and managers of essential services, infrastructure investors have a golden opportunity to lead by example over the next decade’.

The trend is clear. A recent survey by McKinsey of CEOs, CIOs, and other senior executives at 21 of the world’s leading investment institutions found that since COVID, 70% are maintaining or even accelerating their commitment to ESG factors across their investment processes, noting a departure from the 2008-09 global financing crisis when solvency was the chief goal. A  survey of 34 Australian institutional investors similarly found that ‘none responded that [ESG] would become less important’ as a result of the pandemic.

While ESG focuses on predictions rather than measuring impact, this investor preference as the economic crisis unfolds is encouraging news. Not only for the ongoing need to attract much-needed finance to close the $15T global infrastructure gap, and to do so in line with the UN Sustainable Development Goals which place inclusive and resilient outcomes at their core. It indicates real potential for ensuring that both public investment and private finance in infrastructure can be directed in a transformative way in the economic recovery, which is a focus of the G20 Action Plan.

Infrastructure’s central role in economic inclusion

While the significant economic benefits of infrastructure investment on job growth and GDP are well established, inclusive practices in infrastructure are vital, because it is not a given that such assets will be built and managed in a way that serves society equitably or safeguards the environment.

Of the well-established trends already causing a rapid and profound disruption to the infrastructure industry pre-COVID, the Global Infrastructure Hub’s Infrastructure Futures survey of industry leaders found that ensuring inclusive outcomes remains one of their most urgent concerns, and for which we are most unprepared. Inclusion by design has become even more important when investing for the post-COVID recovery, considering the outsized impact that job losses, restricted movement and health risks are having on disadvantaged, low income and minority groups, including women and people with disabilities.

Social procurement – harnessing public and private sector action

Businesses owned by women, as well as many other disadvantaged and minority groups including migrants and Indigenous people, routinely face higher barriers to meaningful commercial opportunities in the infrastructure project lifecycle. The compounding effects of discrimination, working capital and growth capital constraints, and lack of networks and experience are what the OECD has argued are ‘important obstacles that call for corrective policy action’. Such existing imbalances may otherwise perpetuate economic exclusion as a result of major infrastructure investment, even while the broad economic impact is positive.

An increasingly important corrective action is Social or Strategic Infrastructure Procurement policy. Through targets, incentives and clear guidance, governments can formally leverage their significant purchasing power and encourage private sector infrastructure vendors, contractors and operators to work creatively to target groups who would otherwise be poorly considered or face overt barriers. Benefits can include increased job and commercial opportunities, equitably distributed training and promotion, more fair grievance processes and labour protections, accessible technology, and lasting local outcomes. The Infrastructure Sustainability Council of Australia has argued formally for the long term economic value of such strategies, and in a positive development, frameworks have recently been formalised for infrastructure in the Australian states of NSW and Victoria, with application in regional rail development.

Even small redirections of project funding have been shown to have impressive job growth for disadvantaged groups. The US Bank Stadium PPP Project in the US State of Minnesota (USD 975 million; opened 2016) is one clear example of how an Equity Plan established by the project authority for both project development and delivery can turn broad social aspirations into inclusivity KPI’s within a commercially viable venture. Using targets and transparency, this project was able to report that 36% of construction positions on the project were held by minorities, 9% by women, and 4% by veterans. In addition, 90% of the construction budget (a total of USD 400 million) was allocated to local businesses, of which 16% were owned by women, 12% were minority-owned and 1% were businesses owned by veterans.

If you would like to know more about key practices and action areas across the project lifecycle to ensure no-one is left behind in the development and delivery of infrastructure, you can read the full scope in our Inclusive Infrastructure and Social Equity tool, as well as recent interviews with the European Bank of Reconstruction and Development on how this is being financed and measured in practice.

Contact

If you want to know more about the Global Infrastructure Hub, including our work on Inclusive Infrastructure, please get in touch with Director, Thought Leadership, Monica Bennett at monica.bennett@gihub.org.