ESG in Infrastructure
The original version of this article appeared on RBC Capital Markets Insights here.
The role of infrastructure as a catalyst for sustainable growth and as an enabler of the transition to a low-carbon economy has become increasingly clear in the wake of the COVID-19 pandemic. Stimulus packages issued by G20 governments over the last 18 months, including the Bipartisan Infrastructure Deal in the United States, the National Infrastructure Strategy in the United Kingdom, and the European Union’s NextGen program, have placed green and social infrastructure investment at the forefront of post-pandemic economic recovery plans.
At the same time, the global infrastructure financing gap – the difference between infrastructure needs and investment – is anticipated to reach US$15 trillion by 2040. This gap cannot be reconciled by public funding alone; mobilising private capital and public-private partnerships (PPPs) will also be essential. A number of multilateral initiatives, including the G20’s Roadmap to Infrastructure as an Asset Class and the FAST-Infra Sustainable Infrastructure (SI) labelling system, are underway to help advance these objectives.
Sustainable infrastructure and the transition to an inclusive, net zero economy
From transportation systems to energy generation and healthcare facilities, infrastructure delivers essential services and plays an important role in advancing sustainable, inclusive development and enhancing societal resilience. Sustainable infrastructure, which the United Nations Environment Programme defines as infrastructure that is planned, designed, constructed, operated, and decommissioned in a manner that ensures economic and financial, social, environmental, and institutional sustainability over the entire lifecycle, is garnering increased attention in the wake of the COVID-19 pandemic as economies around the world strive to ‘build back better’.
While renewable energy generation, largely driven by wind and solar projects, currently accounts for the majority of private investment in infrastructure projects, infrastructure projects encompass a broad range of subsectors, including transport, telecom, and social infrastructure.
Given the diversity of subsectors covered, public sources of capital play a critical role in catalysing investment in energy infrastructure, reducing risk, and advancing investment in areas where access to capital may be constrained. However, public funding alone cannot close the infrastructure financing gap: mobilising private capital and leveraging public-private partnerships will also be essential. As institutional investors increasingly seek to deepen their exposure to green assets and projects, we anticipate that interest in sustainable infrastructure debt – for example, labelled green bonds with proceeds allocated to building climate-resilient infrastructure – will continue to grow.
Founded in 2017, the Canada Infrastructure Bank (CIB) is a public institution designed to mobilise CAD35 billion in capital over 11 years to invest in Canadian infrastructure projects across five priority sectors: green infrastructure, clean power, public transit, trade and transportation, and broadband. To fill the gap in financing that can prevent new infrastructure projects from moving forward, the CIB partners with public sponsors and private and institutional investors. A significant proportion of the projects funded by the CIB are focused on transformative greenfield infrastructure; with a construction element and no proven history of revenues, these projects tend to be higher risk and without the CIB’s involvement may have otherwise attracted limited private capital.
Embedding ESG considerations throughout the infrastructure lifecycle
In addition to domestic infrastructure investment programs, multilateral efforts are underway to scale up global infrastructure investment. Recognizing the role of infrastructure as a driver for sustainable economic growth and the need to crowd-in private capital to bridge the infrastructure financing gap, in 2018 the G20 published a Roadmap to Infrastructure as an Asset Class in an effort to improve the investment environment for infrastructure, promote greater contractual and financial standardisation, and enhance the availability of clear and timely data.
One year later, the G20 endorsed The Principles for Quality Infrastructure Investment, a set of six voluntary principles integrating numerous environmental, social, and governance (ESG) considerations. ESG factors present stakeholders with both risks and opportunities throughout the infrastructure lifecycle. While materiality will vary across asset type, geographic location, and stage of the project, some common ESG considerations include the environmental impacts on ecosystems and biodiversity, community engagement and inclusive decisionmaking, and climate change mitigation and adaptation.
Sufficient access to data is an important factor to enable infrastructure investment decisionmaking, support project management, and mitigate the risk of perceived greenwashing. Initiatives such as the FAST-Infra Sustainable Infrastructure (SI) Label are an important step in this direction. Endorsed by the Glasgow Financial Alliance for Net Zero and launched at COP26 in November 2021, the SI Label is a consistent, globally applicable labelling system designed to identify and evaluate sustainable infrastructure assets.
A key objective of the SI Label initiative is to close the sustainable infrastructure investment gap by transforming sustainable infrastructure into a mainstream, liquid asset class. The SI Label will also facilitate due diligence processes and structuring of investments for sustainable infrastructure assets, and information on all labelled assets will be available to market participants through a data repository. The FAST-Infra Sustainable Infrastructure Framework (SI Framework) leverages over 20 taxonomies, standards, and frameworks and sets out five requirements for market participants seeking to apply the SI Label to infrastructure assets.
Project Case Study: Calgary Airport-Banff Rail (CABR) Project
In Western Canada, Liricon Capital and Plenary Americas, a portfolio company of Caisse de dépôt et placement du Québec (CDPQ), are proposing to build a low-carbon rail link that will connect the Calgary International Airport and Banff train station. The proposed rail link will have five stops between Calgary Airport and Banff, including downtown Calgary and Morley (Stoney Nakoda). In December 2021, Liricon submitted a proposal to the Government of Alberta and the CIB to advance the Calgary Airport-Banff Rail (CABR) project from Phase 3 (Development) to Phase 4 (Design). The proposal for the CABR project, which is currently under review by the Government of Alberta, is structured as a public-private partnership, contemplating financing from private and institutional capital as well as the CIB, to deliver a rail system by 2025 that has the potential to be hydrogen-powered.
CABR is anticipated to bring about a number of economic and environmental benefits to the region, increasing labour mobility, expanding and diversifying Alberta’s economy, and reducing carbon emissions. The CABR system also directly supports the Banff National Park Net Zero 2035 initiative, which aims to make Banff the first community in North America to be net zero. In addition to attracting business and tourism to Calgary, CABR will provide inclusive access to the mountains for Albertans.
RBC Capital Markets is supportive of the CABR project and its long-term economic, social, and environmental benefits and we look forward to the future financing opportunities associated with the project.
The role of infrastructure as a catalyst for sustainable growth and as an enabler of the transition to a low-carbon economy has become evident in the wake of the COVID-19 pandemic. Mobilising private capital and leveraging public-private partnerships will be essential to scale up investment, realise the full potential of infrastructure, and close the global infrastructure financing gap. As institutional investors increasingly seek to deepen their exposure to green assets and projects, as well as invest in projects which advance socio-economic inclusion, we anticipate that interest in sustainable infrastructure debt will continue to grow. RBC Capital Markets has extensive knowledge and experience across the infrastructure sector and partners with our clients to provide them with the market insights and sustainable debt solutions needed to succeed and thrive in the transition to a low-carbon economy.