ESG and infrastructure – do the numbers stack up?

Time was you could invest in a wind farm, tick the ESG box and job done. Not any longer. ESG principles continue to gain increasing significance for funds as more investors seek to ensure that capital is deployed not only for profitable returns but also for responsible and sustainable outcomes.

ESG encompasses more than a commitment to invest an environmentally responsible manner, it also includes a sustainable approach to the use of resources, respecting human rights and human capital, anti-bribery or corruption, non-discriminatory, diversity and equality practices, and a commitment to transparency, accountability, and good governance – it is a long list of due diligence that comes with a cost and arguably, in the infrastructure space at least, no benefit on cost of debt.

So how do ESG principles fit into infrastructure investing? What are their implications, costs and benefits when financing assets? How do developers embed ESG principles in projects and how do asset managers ensure that ESG portfolios drive sustainable returns for investors? Proximo gets feedback from a spectrum of experts at the ESG cutting edge in infrastructure development.

Participants

Chairperson: Paul Nicholson, Proximo

Simon Whistler: Senior Specialist, Principles for Responsible Investment

Lisa Shaw: Investment Director, Infrastructure Debt, Vantage Infrastructure

Andrew Steel: Global Head of Sustainable Finance, Fitch Ratings

Laurence Monnier: Head of Strategy and Research, Alternative Income, Aviva Investors

David Kemp: Director, Project & Infrastructure Finance, M&G Investments

Marija Simpraga: Infrastructure Strategist, Legal & General Investment Management

Paul Nicholson: ESG is becoming an increasingly important issue in infrastructure investment decisions. But what factors and which types of investors are driving that change?

Simon Whistler: There are two or three different angles to look at. You have infrastructure investments themselves being pitched as sustainable or as ESG-focused by the type of infrastructure that investors are looking at – renewable energy being the most obvious example of that. You also need to look at it from the point of view of how you integrate ESG into your management of assets, whether they're necessarily immediately sustainable or not.

You see people making the choice to invest in certain types of infrastructure, but also taking the time and effort to implement and integrate ESG better into their overall asset management. The two trends aren't necessarily unrelated, but I think they're two slightly different concepts.

Paul Nicholson: So is ESG essentially an investor-led agenda in infrastructure?

Simon Whistler: We're seeing more and more investment and asset manager saying "this is something that was required of us by our ultimate investors". It comes from the ground up in terms of what different types of stakeholders want to see from investors and infrastructure operators – you're seeing drivers from both sides of the equation.

Within organisations themselves there's an understanding that it's good for business. It creates opportunities and manages risks. We're seeing all those different elements being brought together.

Paul Nicholson: So what has driven ESG to the top of investors' agendas around infrastructure?

David Kemp:   There are at least six main reasons why ESG is important to us. One is we now have more clients placing their money with us who care more about where their investments go and they're expecting more information on that. Increasingly, ESG is seen as part of our fiduciary duty to clients. There is increasing evidence that incorporating a sensible ESG strategy can lead to better returns. Having a strong ESG strategy is increasingly a competitive advantage when we're looking to raise money. More broadly, there's the recognition that having the right investment strategy can have a really positive impact on society. Furthermore, with increasing information ubiquity, what we're doing is more likely to be publicly available – so we need to be investing in the right things.

They're probably the main drivers, but I also think that it doesn't necessarily stop there because ESG is becoming more sophisticated. Six years ago we'd look at a renewable energy transaction and tick that's good for the environment. Now, natural capital, biodiversity and other considerations are also being considered. Also, there's a shift towards impact investing, which brings its own particular considerations beyond ESG.

Broadly, we need to make sure that we have considered all of the relevant risks when we're looking to make an investment – if the focus is just on ESG, one could ignore other important aspects.

Paul Nicholson: What do you think is driving the ESG agenda and is there anything specific within it – either the E, the S or the G – that investors are particularly searching for in this new world?

Laurence Monnier: ESG means different things to different people. For example, the Paris Agreement in 2015 was a key trigger in France; shortly afterwards, a law was put in place to make climate disclosure mandatory and that drove huge interest in the climate transition by French investors. Today, around 75% of institutionally managed assets in France have ESG criteria.

In the UK, the ESG focus is slightly more recent, but we’ve seen strong evidence governance and climate transition are important for investors. Two years ago, most requests for proposals on investment mandates we received from clients didn't even mention ESG. Now most of them have a big section on ESG. The net zero carbon agenda, the increasing awareness of the Sustainable Development Goals – all these big initiatives are front of mind for investors and increasing the demand for investment strategies aligned to these goals.

I agree with David. It's a complex world that covers many issues. You can have good credit or bad credit, and apply a rating accordingly, but it is difficult to summarise ESG in one letter. A more thoughtful approach is needed.

The PFI programme in the UK was dropped, in part, for ESG reasons – concerns about governance and alignment of interests. Yet if you look at its social impact - the number of schools and hospitals delivered - it was hugely positive. So ESG is a complex area, and there is long way to go for people to really appreciate what it means and where to focus.

Paul Nicholson: Marija, Legal & General Investment Management is a UK firm, but you have investments in the US as well. What are you seeing geographically in terms of the focus on ESG? Is it something that you're seeing more in developed economies? Is there a concentration, perhaps, more towards countries which have a greater sense of governance and care about these things more, perhaps?

Marija Simpraga: Yes. So far we've seen it being a very strong phenomenon in Europe, particularly Western Europe and North Western Europe. I would say less so in the US, but there are signs that this is increasingly being brought up as an issue there as well.

One of your questions was whether ESG can shift capital flows significantly between developed and developing markets. I don't think so. If you want to look at where ESG has the most impact, it'd probably be something like building solar panels in India or Egypt. But there are parameters around risk tolerance for particular countries, on FX for example, that I think would prevent ESG from driving capital flows in the way you suggest.

Paul Nicholson: One of the things that is often noted about ESG is that it potentially can drive the costs or increase costs in terms of assets because of the amount of due diligence, if you like, that needs to take place in order to meet these various criteria. Is that your experience?

Lisa Shaw: As debt investors, we don’t see directly increasing costs. Across our portfolio, ESG analysis really sits hand in hand with the credit analysis that we do. A lot of the aspects that we check with an ESG hat on are linked to underlying credit considerations. Those aspects are now receiving additional focus under an ESG lens. For instance, aspects such as low carbon or e-vehicle transition are obvious ESG considerations, but they also impact the same fundamental credit considerations we've thought about for a while.

From the aspect of our business as an equity investor, however, our portfolio companies are definitely subject to increased reporting and numerous different and constantly evolving ESG-related standards.  Of course, there's a time and resource aspect involved, so whilst we do view this reporting and transparency as important, there also can be some pushback from companies at times. At Vantage we are very supportive of initiatives like GRESB that help provide standardised reporting that can help hold our portfolio companies accountable and provide a strong framework with which to be able to benchmark across the industry and see where the areas of best practice are. This helps us ensure that we're also improving our own practices and, ultimately, helps provide a better return to our investors because we're able to better mitigate that reputational risk or potential ESG damage.

Paul Nicholson: Coming to the credit side, obviously there is a relationship between ESG and credit ratings. Each of the credit rating agencies have developed their own ESG indices and there are other specialised ESG agencies out there as well. So how does ESG affect credit rating? And is there a requirement for standardisation across ESG indices in order that investors have the same criteria to look at?

Andrew Steel: You initially made a reference to the big credit rating agencies having all done something on this. Actually, they've all approached it extremely differently. To date, I think we [Fitch] are the only agency that has gone on an entity-by-entity and sector basis and fully integrated it into our research.

I've been puzzled why others haven't done that. It's difficult and complex to execute, which may be the reason. There is a tendency to talk broadly about ESG risk aspects for a sector, but what we discovered when we started looking at it entity by entity is, as Lisa said, that these are not new risks that didn't exist before, it’s just that you're looking at it from a very specific categorisation perspective.

When you look at the categorisation of different ESG risks, what you find is that a risk that manifests itself for an entity does not necessarily manifest itself in the same way for all entities within the sector. It can vary tremendously. That's one thing that the work we've done so far has really thrown out – it depends who you are (business and financial profile) as to how it impacts you.

Part of the work we've done is to create templates that start with broad general ESG risk categories which are consistent across all templates. Then, for each sector that we look at, we display which sector specific factors are relevant from a credit perspective.  For instance, for a sector like automotive manufacturers, if you look at the general issue category of greenhouse gas emissions and air quality then the credit relevant aspect is the emission standards for the vehicle fleet being manufactured. If you get that wrong – an example would be Volkswagen which got that pretty badly wrong – we also identify in the template the traditional areas of qualitative and quantitative analysis you might see impacted – in this case things like brand positioning, profitability and ultimately financial structure.

For Volkswagen, our analysts view was that it didn't affect their brand positioning or ultimately their financial structure (they didn’t have to raise additional debt). They were big enough to survive it. But it did severely affect their profitability.   Identifying this level of granularity is key as impact can often vary between entities in the same sector.  For example, if the emissions scandal had impacted say Jaguar Land Rover, then as a premium and more niche manufacturer it is likely that its brand positioning would have been impacted as well as profitability.  Given that JLR is more highly leveraged then it is likely that they would have needed to raise additional debt to meet fines and therefore it would have affected their financial structure too. This illustrates the importance of considering this sub-category of risks at an entity level and in the context of their overall business and financial profiles rather than generalising by sector.

Even on a simplistic basis, you could see that the impact can be very, very different. We had a lot of investors originally saying to us "what's your weighting for this risk for this sector?" What we said is, "Well, you can't really do that because it can be 7% for Jaguar Land Rover and 2% for Volkswagen for exactly the same issue. If I tell you, overall, it's 5%, it's completely meaningless."

You need to be a little bit careful about who's doing what in the ESG space as there is lots of confusion around what the various products from service providers and rating agencies actually demonstrate. That comes onto your question about the overall scoring? The one thing that we found when we looked at the market was that there is very, very little out there that makes a concrete link between ESG risks and credit. There is lots of information that makes broad statements that covers equity and credit, but that's not particularly helpful if you're trying to do detailed entity-by-entity credit analysis.

I think most people have ducked the credit aspect because you need a lot of resource to calibrate and consistency check and that's why investors have been repeatedly saying to the big agencies, "Why don't you do it?" We've talked to investors right across the globe and the biggest two areas that are behind the drive for more ESG analysis are asset owners and asset managers.  The owners want their managers to report on it and are starting to judge manager performance based on ESG criteria as well as returns; and asset managers are also being asked to display ESG credentials by asset owners looking to select a manager.

The ESG focus is proving to be problematic for some areas, particularly CLOs, where due to the size of the entities and the loans there is often very little public information or disclosure.  But then there’s also political and regulatory aspects, which Laurence was talking about. Regulators are also starting to get very interested in the ESG service providers and their products, some of which is clearly politically driven. From a market perspective ESG information and data can be very confusing. For instance, there are over 220 ESG service providers providing more than 325 different products, many of which are referred to as ratings, but none of which are regulated (unlike credit ratings) and a range of methodologies which display little or no consistency in approach.

Paul Nicholson: We've seen standardisation across a number of green instruments. Is there a requirement in the market now for a move towards standardisation of ESG criteria so that investors can make comparative evaluations across infrastructure assets specifically?

Laurence Monnier: It is quite common for the same asset to have good and bad ESG characteristics. Themes that were not even thought about a few years ago, like plastic particles, are now completely at the forefront of the environmental agenda.

While this makes standardisation difficult, it is also unavoidable and desirable. Internally, we have developed an approach to assessing ESG for our investments. This helps, but across the industry this doesn't necessarily carry the same weight for an investor as a credit rating.

However, I do think the push towards standardisation will pick up. We are a founding member of the GRESB for infrastructure, which is trying to bring consistency across firms in terms of disclosure.

At the regulatory level, the EU taxonomy initiative is likely to have a big impact on the way investors look at sustainability. So there are already a number of initiatives moving in the same direction. My own view is that because ESG is so complex, we do need to develop accepted international standards and measures around key factors, such as carbon footprint, to set a level playing field that people can easily understand.

Paul Nicholson: Simon, you're looking after a very large cohort of investors that are specifically focused on this. There has been, as Laurence mentioned, the green taxonomy at the EU. From a regulatory point of view what do you see as the drivers for supervision of these ESG measurements going forward? Do you see a need for standardisation or not?

Simon Whistler: Obviously we were very heavily involved in the work around the EU taxonomy, so yes, we're very much proponents that governments/regulators do need to try to establish baseline definitions as far as they can for green investing or green investments, also taking into account of a ‘do no harm’ principle for the social perspective. There's enough evidence to suggest that that's catching on among other governments and regulators around the world as well. Following on from the EU's example, Canada and Malaysia are working on their own taxonomies, while countries as diverse as Australia, China and Mexico are pushing forward on sustainable finance initiatives, whether they are government- or investor-led. So there is momentum, and not just in developed countries.

The important point is that a baseline has been established. There will always be individual investors and/or countries wanting to push things further, so hopefully that baseline will continue to evolve over time and individual investors will also continue to evolve their work, whether that's on climate, whether on social issues, whether on governance issues.

Andrew Steel: Our experience is that there is a decent amount of coordination going on at government level between countries, for example China is introducing minimum disclosure standards which kick in this year. We are aware that when China was looking at developing these, it spent quite a lot of time talking to the UK and the EU, because it was keen to ensure that it wasn't coming out with definitions that added to the confusion. But I think if you’re going to achieve better standardisation (which we consider essential for market development) then I think you need more than just a broad political or regulatory push, you need something that is much clearer about definitions and exactly what they’re being used for (disclosure, reporting etc).

There is also a fundamental difference between the approach from an equity perspective and a debt perspective. Debt is about protection against downside risks, and infrastructure debt is generally structured to protect you from that anyway (risks being allocated to those best able to manage them). The fact that infrastructure investors didn't classify risks separately as an E risk, an S risk or a G risk doesn't mean the risks weren’t considered and allocated, and therefore for many transactions looking at them through and ESG lens doesn’t really make a lot of difference. People are allocating the risks to be managed most effectively.

When we went through our entire infrastructure portfolio and assigned ESG scores, what we saw was that in the infrastructure space, from a credit perspective, the influence of E, S and G is a lot more esoteric and it is very much lower impact than other sectors. It only affects about 5% of entities that we rate. There is also no common theme or trend to that across infrastructure asset classes. It's all to do with transaction-specific aspects – the only common theme or trend you might argue that there is is governance. In terms of governance the issues are mainly to do with operational practices and correct implementation of operational procedures and governance.

On a highly structured infrastructure transaction, the ESG risks are a lot less impactful than is the case for a standardised corporate, bank or insurance company.

Paul Nicholson: Does ESG have an impact on the ability to raise and the cost of cash to get projects funded? Much of this stuff would be happening anyway as part of project due diligence and arguably all we're doing is relabelling?

Andrew Steel: The only area I would say that I've come across where there very clearly is a benefit is in the Nordic region where you can see that there's about a five basis point debt cost benefit. A lot of that is to do with investors' remits in this region where you have a high proportion of asset owners focused on ESG and so the approach is quite directive, e.g. "Please focus on doing this particular type of asset in this particular type of country." It's perhaps more of an impact investing approach. Elsewhere in the world, you can try and make justification for cost savings and you can find areas where it's been better and worse, but each time it's almost impossible to isolate the ESG tilt and say, "That's because it was a green bond or an ESG bond."

It may be the case going forwards that you end up with enough performance data to show some kind of pricing benefit, but at the moment there's not really enough public evidence. Given there is a weak argument for a price benefit then often people raise the issue of ‘additionality’ being driven by green financing.  This is an argument I’ve heard articulated from both angles, with some journalists in particular focusing on infrastructure and saying "there's no additionality from ESG, so what's the point? It's completely pointless when the projects will get done anyway. Why are we all wasting time and effort on it?"

I think fundamentally that argument misses the point.  Clearly no one is going to start off doing a project that’s uneconomic just because it’s ESG focused, but if we have a choice about how to structure something and there isn't a difference in the outcome from a credit perspective or a risk perspective, then starting to introduce a management discipline around ESG is no bad thing.  In that respect it is more about changing the mindset so that the approach says, “If we have these two choices. We'll take the one that provides the greater social benefit,” or, “We'll take the one that provides a more certain environment trajectory path for this project”.  In this respect there is additionality through changing preferences and implementing better practices. That's really what I think the change is about initially. It's about changing mind-sets.

David Kemp:   I agree with Andrew that it's hard to pinpoint price differentials today, but that theme is changing.

Finance documentation that used to require compliance with the Equator Principles, is now also requiring greater openness and transparency, consideration of human rights and the rights of employees, ethical supply chains and so on. This is particularly important as the ESG criteria mature and we also focus on investments with a positive impact.

Marija Simpraga: I think the impact or how obvious the impact is can vary from sector to sector and how pressing it is to the financing case.

If you're looking at aviation assets for example, you're operating in an environment where passenger flows are meant to double in the next couple of decades and the share of emissions from aviation is going to increase quite significantly. If you're financing something for 20 years, do you believe that in that time regulators won't turn around and say, "Wait, we're not taxing them at all"? There is no pollution management regime. There's no way to account for the pollution they're causing. Is that your base case?

Then you start thinking about, "Okay, well, what kind of stress testing can we do to say, from a debt perspective, we've taken these factors into account and it stacks up," or, "It doesn't stack up. I think, yes, it really depends on the sector you're operating in and how long term you want to be or the view you want to be taking.

Andrew Steel: It also depends on the region as well. If you are in emerging markets and have diesel trains replacing 20-year-old diesel trucks, under current frameworks you'd be able to show that as actually very positive.  However, if that were in the EU then perception would be very different.

Laurence Monnier: If big investors are shying away from entire sectors, be that debt or equity, it's going to increase the cost of capital – it has to.

Investors, particularly in continental Europe, started integrating ESG by excluding certain sectors. The EIB, for instance, announced recently it will stop financing coal. A lot of investors are shying away from fossil fuel. If many large investors exclude entire sectors, it will have a price impact. But the market is evolving, and people are now looking beyond exclusion to risk analysis and ESG ratings. Now it's moving into impact. There will be more products focused on certain ESG impacts. They will price in the ESG risk and impact, and will also influence the market.

When we invest, we all look at ESG and climate impact at a micro level – what's the ESG risk and ESG impact for each investment? We have factored this into our risk assumptions and investment decisions for a while. But at the macro level, if you look at portfolio construction today and you're heavily invested, say, in oil and gas, you have to consider how environmental concerns might impact value ten years from now. Because we manage illiquid assets, this is the sort of thing we can't rebalance going forward, so we have to anticipate it when we invest today.

Paul Nicholson: How do you feel about sustainability-linked bonds and loans. Do you think that model is sustainable for lenders, given the yields environment?

Andrew Steel: That's a strategy question. If I was a lender, I'd be balancing doing some very highly profitable coal and oil stuff with a nice big ESG portfolio so I could say, "80% of our stuff is ESG, but actually 80% of our returns are in the 20% that's not.” But joking aside, I do think for those who hold long-dated illiquid assets, there are some risk aspects that are starting to creep in which would not have been foreseen in the original structure of the transaction or they would have been looked at it very, very differently.

For example, environmental catastrophe risk has to be an issue where in the past, if you were looking at project financing a hydro dam, you would assume a certain level of drought years and so forth. But now what seems to be happening is the linear relationship that insurers would have used in the past to say, "This is a 1-in-20-year event, this is a 1-in-50-year event and therefore we'll structure and plan for that," seems to be breaking down and the frequency of occurrence of events in certain areas is becoming non-linear. That must be really difficult for infrastructure investors to cope with given the original transaction risk allocations.

Marija Simpraga: Well, we have an example. On our public investment side, we have developed ESG methodology and a way of looking at the world. A lot of products came off the back of that. Some of the questions that they found in their research were material, we took over and tried to adapt to our world. The weather is changing and some assets should really start thinking about that now.

Simon Whistler: There are tools being developed and there are frameworks available on assessing physical climate risks, but there are difficult questions to address: what temperature scenarios do you use? What time period are you looking at and how do you map that against your portfolio? People are starting to use them to plan out, "Well, if this geography is going to be exposed to this level of climate risk over time, then that obviously influences the type of decisions we make there," and so on. But it's very much an evolving issue and we don't know, specifically, how different types of physical impact are going to occur over time, regardless of how sophisticated the modelling is.

If we're talking about something happening in 2050, investors are wondering how relevant it is to an investment now that you're holding for 10 years?

Lisa Shaw: One of the key issues is transparency and how the sustainability of bonds is being assessed by different agencies. We'd be more interested in assets that have increased reporting and transparency than a sustainability-linked bond with a third party ESG rating that we’re unsure of the methodology behind and can’t analyse in detail and form conclusions on ourselves. When we perform our credit analysis, we want to get into the financial metrics and the drivers behind that. It's exactly the same for the aspects relating to ESG, the problem we currently face is access to data.

Laurence Monnier: Another point, although slightly different from the original question, is what is environmental risk and its impact on the return or the ability to repay debt? That's critical and that's probably the one thing debt investors focus on most. Yet, ESG is a much wider universe. It's not just a risk, it's also about creating a positive impact.

People tend to focus initially on things that appear environmentally friendly – renewables is a quick tick of the box. But I think there is a much better prize to be won in decarbonising huge carbon-emitting industries. Investing in “dirty” industries and cleaning them through carbon capture or other techniques is probably having more impact – at least in the short term - than investing in clean industry at the start.

Within infrastructure, there is also a big social and governance agenda that we're all grappling with. I mentioned PFI in the UK before because that's an example of a good social impact which, ultimately, was heavily criticised and that was nothing to do with the environment.

There is a big political push now on net-zero carbon and climate transition is an absolute key priority.

There is no such clear priority on social impact or governance.   If you look back, these factors already have shaped the environment we live in and will continue to do so. If you take the Gilets Jaunes movement in France, you can see social pressure hampering environmental considerations. Is it right for customers to pay for climate change or should some tax be paid? What's the alignment of interest? All these issues are quite critical in infrastructure.

Simon Whistler: Indeed. For me, the social side of infrastructure investing is an issue that we're hearing a lot about from our signatories. It's something that, historically, has often been viewed as an issue in emerging markets. Essentially, you need to gain your social license to develop and operate a piece of infrastructure – that's been the most critical element of being successful or not in emerging markets. Now this seems to be moving into developed markets where previously the conversation around the role of private investment in delivery of public services and so on had been more reconciled. The role of private investment is coming more and more under scrutiny.

I think it's interesting to see whether there are, potentially, lessons to be learnt from how investors and companies are operating in emerging markets and how those can be applied in more developed markets.

Paul Nicholson: It's an interesting point – can ESG can be an inhibitor or a barrier to infrastructure investment given the governance metrics within emerging markets might be not quite strong enough to meet investor standards? How do we work around ESG principles to make sure that investment gets to where it's needed?

Lisa Shaw: It can be an inhibitor, and one that is not just limited to developing markets. We've seen investments in the UK, particularly in the specialised healthcare or education sector, that on the one hand perform a clear social benefit, but the potential reputational risks should something go seriously wrong within these organisations could be serious and we find investors are increasingly concerned about reputational damage.

That inhibiting factor runs right the way through from developed and heavily regulated markets to developing markets that typically don't have such policies in place. Of course, strong governance and robust policies are always going to help, but from both our and our investors' perspective, there are some sectors, transactions and jurisdictions that are challenging to finance. In emerging market jurisdictions, it’s not easy to bridge that gap without improved regulation, governance and transparency.

Andrew Steel: You come back to the mindset issue again. I was talking to the CFO of one very large French contractor who said: "We are not going to issue a green bond because our strategy now is that we will not undertake a project unless it is having a mitigating effect. Why should we issue a green bond when fundamentally, we won't do anything that isn't assisting the environmental aspects of being green. Therefore, we don't see why we should have to label our debt issuance as green. If people understand what we do, they should understand that we are totally green. You don't need to have somebody else certify that."

I thought that's a fair point.

The problem is, if you get people, smaller investors in particular, saying, "Well, I'm not going to do coal and I'm not going to do this sector or that sector" then to Laurence's point about doing stuff that improves the bad things, what you'll end up with is lower liquidity for those particular sectors, higher costs, and potentially stranded assets.  This in turn might make it even less attractive to try and do some of these projects. I personally think when you try and start connecting all these dots and imposing an ESG framework, what it comes back to – and it affects PFI in the UK as well – is that governments will need to step up and take responsibility for some of these risks or infrastructure projects just won’t happen. To date, governments haven’t done so.

What they've done is what they did with PFI, which is try and push all the risks and the problems onto somebody else, try and get it as cheaply as possible and then discover, “maybe it wasn’t a smart idea to do that, when the contractor goes under", but then they blame the private sector for it.

If you look at the ESG emissions areas that have been tackled from a regulatory perspective, you'll find that governments generally have only tackled the easy sectors like utilities. Hey presto, what a surprise the only areas tackled so far have been ones with reasonably high margins and widespread consumer bases, so you can add costs and they’ll be tackled through a mixture of companies in the sector absorbing part of them and passing the rest through to consumers.

Few governments for instance have done much with airlines, and airlines are a large carbon-emitting sector. However, airline margins are very thin, and so any action is immediately felt by the consumer and the airlines are likely to be vocal about the politicians causing the increase in flying costs.  This clearly would make voters feel less wealthy and therefore might be political suicide. Currently I think the view may be "Well, actually we won't touch that because it's a long-term issue and if we make a decision now that adversely affects voter lifestyles then we'll never get voted in again."

Marija Simpraga: I think that one thing that we also noticed is that the ESG discourse has been helpful in many ways, but it's also been less helpful, harmful, frankly, in others. We are, as infrastructure investors, all constrained by the framework that the government puts in place and the regulation. Sometimes we get asked, for example, why some of the rolling stock we invest in is diesel-powered. This is because the current policy is not to electrify some parts of the tracks, and so you have a choice of two less-than-ideal options. Not having these trains means people will get into cars and cause more pollution. There is also the social impact that the loss of connectivity would entail for these, often rural and less affluent, communities. 

It becomes more a lesser-evil discussion. I think we're in a bit of a situation where perfect can be the enemy of good. I think that that's happened more than once in this context.

Laurence Monnier: You need a really nuanced approach. At Aviva Investors, we have a dedicated global responsible investment team and a dedicated head of ESG for our real assets business. When the investment teams, or our clients, have questions or concerns, we have the benefit of experts who can analyse the ESG impact on any single investment. 

If you're not sophisticated, you may say, "Well, I don't touch certain sectors because they have reputational risk." Our specialists will be able to give a nuanced view on the ESG impact of a given investment before and during the holding period, and whether its overall impact is positive or negative. That has helped us move forward as a business and execute transactions that more conservative investors may not have done.

I'm hopeful the debate will become more sophisticated. Some of the barriers we’ve discussed may go away and people will have a more nuanced approach.