Making investments in infrastructure debt impactful from a sustainability angle requires a perspective that goes beyond an attractive risk-return ratio and obvious green infrastructure assets such as solar plants. Apart from a wide network to source loans that are suitable, there is a need for a strong research and assessment capability to safeguard their ‘greenness’.
On this Talking Heads podcast, Daniel Morris, Chief Market Strategist, Investment Director for Infrastructure Debt Stephanie Passet and ESG Specialist and Lead on Private Assets Maxence Foucault discuss the ins and outs of sustainable investing in infrastructure debt in an environment where definitions are still being finetuned and the regulatory framework continues to evolve.
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Read the transcript
This is an article based on the transcript of the recording of this Talking Heads podcast
Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis through the lens of sustainability on the topics that really matter to investors. In this episode, we’ll be discussing sustainable investing in infrastructure debt. I’m Daniel Morris, Chief Market Strategist, and I’m joined by Investment Director for Infrastructure Debt Stephanie Passet and ESG Specialist and Lead on Private Assets Maxence Foucault. Welcome both of you, and thanks for joining me.
Stéphanie Passet: Thank you, Daniel. Nice to be here.
Maxence Foucault: Hi, Daniel. Hi, Stephanie. Glad to be with you today.
DM: We’re all aware of the challenges of investing with rising interest rates. You have the additional challenge of trying to achieve sustainability objectives, so how do you combine sustainability objectives with attractive risk returns for investors?
SP: As you know, infrastructure debt is about financing essential services such as energy, transportation and water distribution. As an asset class, it has proven resilient over different economic cycles. This is again the case in the current rising inflation environment, as most infrastructure revenues are inflation-linked or allow for price increases to be passed to the end-consumers. As for returns, our infrastructure debt strategy is mostly floating rate and benefits from an increase in base rates. We have observed no significant pickup at this stage, especially for core and green assets in terms of spreads. To find an attractive risk-return on green sustainable assets, you need to find less obvious assets and assess them carefully from a sustainability angle. For this, we rely on the strong expertise of our sustainability centre.
MF: Sustainability is becoming increasingly central to allocation strategies. There is a growing appetite for assets that are easily identifiable as ‘green’. Typical examples are solar plants or wind farms. But there are also assets which may be less obvious to traditional investors, perhaps because they require more expertise – such as assets that are in the midst of transitioning. I’m thinking of utilities in the process of lowering their emissions, or solutions that are relatively new, like hydrogen, gigafactories, energy storage, biogas or even carbon capture. In this particular context, origination capabilities are key.
SP: You’re right. Each member of our infrastructure debt team has developed their own network of partners – be it a syndication desk, advisor or equity sponsor. We have a specific partnership with BNP Corporate & Institutional Banking, especially with the low carbon transition group that is well placed to identify low carbon loans that we could invest in as part of our climate impact strategy. Beyond sourcing, expertise in sustainability is absolutely key.
MF: There are frameworks that will enable more harmonisation in the way things are done, for instance, the EU taxonomy, an ambitious framework by the European Commission with the purpose of driving the economy towards green solutions. This is only at the beginning and market players are only slowly starting to align with its requirements. We see alignment with the EU taxonomy increasingly assessed in the due diligence process, but alignment is the exception rather than the rule, and ESG data still needs to be harmonised in this context. This is why we need strong internal sustainability expertise. We have defined a proprietary approach for our strategies to contribute to mitigating climate change, based on two main gateways, the EU taxonomy and also the United Nations Sustainable Development Goals.
DM: In the current evolving regulatory context, we have seen asset managers challenged in particular regarding the definition of sustainable investment and reporting requirements. How have you addressed this?
SP: It’s true that it’s challenging to structure a long-term sustainable product in a constantly changing regulatory environment, with the Sustainable Financial Disclosure Regulation and the EU taxonomy Max. This is why we work closely with our sustainability centre and our legal team and have a regular dialogue with our regulators.
MF: We already had a strong experience in integrating ESG before the regulation arrived. We have different layers of assessment. The first is to make sure that every investment opportunity is aligned with our Responsible Business Conduct policy, meaning that these investment opportunities must not violate international norms like the UN Global Compact or the OECD guidelines, but also that they don’t expose us to controversial or sensitive activities or sponsors. The second layer is a transversal ESG assessment. We go beyond climate [change] and look at biodiversity or impacts on local communities. Once this is done, we have a further layer of assessment which we undertake with the help of an independent expert who calculates certain metrics and assessments. These include emissions alignment to [the Paris agreement] temperature scenario and an environmental score. We were doing all of this before the Sustainable Financial Disclosure Regulation arrived, so when it did arrive, we already had the fundamental bricks that enabled us to build a sound approach with binding criteria in line with sustainable investment requirements.
SP: In terms of reporting, we produce an annual report on all our legacy funds in the team, which includes a qualitative and quantitative analysis of each of our investments. There is now a greater expectation from investors to have access to reliable data regarding sustainability, which they can use for their own reports to safeguard their requirements. It is important that the data is produced in a specific standardised format, such as the European ESG template. so, we align to this as well.
MF: We have a solid base in terms of reporting and we are trying to go a step further. We aim at reporting on the principal adverse impacts required by the regulation, which means getting the data from borrowers or providers. And alongside this, we also produce an impact report which will disclose information per asset and the impact generated by the portfolio.
DM: Looking to the future, is there still scope for innovation in the context of ESG integration?
MF: Absolutely. What we’re doing for this strategy is try and go beyond ESG and integrate the impact dimension. Infrastructure is an asset class with a strong potential for impact. And I’d like to stress that infrastructure will be fundamental in enabling the transition to a low carbon economy. Why? Because it’s on the basic services provided by these projects or assets that the economy can function. For economic players to achieve their emissions commitments, they will need to rely on efficient infrastructure like clean energy production, charging stations, energy storage solutions and so on. These assets are usually considered as ‘alternative’, but they’re actually central to climate considerations. For more context around the subject of impact, BNP Paribas Asset Management is a founding signatory of the Operating Principles for Impact Management, an impact framework launched by the International Finance Corporate (IFC), an arm of the World Bank. The framework lists nine principles that define what is an impact investment. We want to design this as an impact strategy which seeks to be aligned with the OPIM.
SP: Infrastructure is an evolving asset class, for example, in terms of sectors that we see emerging, we have new sectors within the scope of decarbonisation, such as gigafactories, green hydrogen and carbon capture. We see also an interesting discussion on projects that are not yet decarbonised, as well as a discussion on natural capital, for example, forestry. We also foresee more developments related to the ‘S’ of ESG, especially when the EU social taxonomy is available. So, a lot of new prospects and many more to come on the infrastructure side and the climate impact strategy.
DM: Stephanie and Maxence, thank you for joining me.
SP: Thank you, Daniel.
MF: Thank you, Daniel. It was a pleasure to be here today.