Do sustainable, resilient infrastructure projects deliver better returns for investors and lower cost of capital?
Data gathered through a new investment industry assurance standard will show the affirmative, its creators hope, and increase private finance of projects in developing economies.
The problem to date has been providing institutional investors with access to realistic projects that meet their requirements for strong, stable returns and transparency.
Now, a new standard is aiming to help all the parties involved in building new infrastructure – investors, clients and developers – establish which projects are most likely to perform long-term, show resilience in the face of change and provide real environmental and social benefits: effective management across the triple bottom line is becoming mandatory for private backing.
SuRe – the Standard for Sustainable and Resilient Infrastructure – was launched by not for profit foundation Global Infrastructure Basel (GIB) at the COP21 international climate negotiations in Paris in December 2015.
SuRe is focused on emerging economies’ particular needs for sustainable and resilient infrastructure. It is voluntary and non-legally binding. But the standard is independently certified and puts a sharp, critical focus on the governance, sustainability and long-term resilience of infrastructure projects. It also highlights their positive environmental or social impacts.
- On 29 June Mott MacDonald and GIB are hosting an event at the London Stock Exchange to explore how sustainability and resilience standards, combined with the right expertise, can deliver value to investors and support investment decision-making. Click here to register
In short, it is an effective way of deal with the growing requirements of investors to better match investment with sustainability macro-challenges. Verification under SuRe will give confidence that the project is set up to a high standard and create a common understanding of what its societal benefits are. That done, although it does not act as financial viability standard, SuRe should open access to wider sources of finance while the comprehensive management of risks will, ideally, make the return more steady and stable.
“Most standards are driven by the interests of one group of stakeholders,” says GIB chief executive Hans Peter Egler. That results in a partial picture of the way a project has been set up and how it performs during delivery and in use. SuRe offers a much more holistic – and valuable – view. “SuRe provides a platform for the three major stakeholders for infrastructure – the public sector, financial bodies including insurers, and project developers. And it creates grounds for trust between the parties.”
The standard has two root strengths: First, it can demonstrate benefits which support and broaden the case for investment. Second, it improves understanding of risk and opens new opportunities for mitigation, strengthening project performance. Managing and reducing sustainability and resilience risks to gain SuRe certification helps avoid unnecessary costs, delays and objections. “It effectively reduces the probability of negatively impacting on the economic viability of the project,” Egler says.
This goes beyond risk mitigation to highlighting an infrastructure project’s net positive impacts for society and the environment, alongside the provision of the defined infrastructure service.
GIB developed the standard with French investment bank Natixis. A whole series of organisations including the European Investment Bank, Local Governments for Sustainability (ICLEI), the International Federation of Consulting Engineers (FIDIC) and the WWF have contributed to it, many of them sitting on the SuRe Standard Committee.
“In order to get new and more investors on board, Natixis intends to use SuRe to clearly highlight the environmental or social value of infrastructure projects in order to better align itself with investors’ ambitions and engagements,” notes Cecile de Coincy, sustainable and resilient investment analyst at Natixis and a co-developer of the standard.
The standard meets and urgent need to bridge between infrastructure proposals and investment comments Davide Stronati, a member of the SuRe Stakeholder Council and global sustainability leader at consultant Mott MacDonald.
“Although financial institutions have been looking at sustainability for the last 20 years and want to use it to minimise risk, the understanding of sustainability in the infrastructure sector is still very immature,” he says. “With investors asking about project resilience demanding evidence of strong sustainability governance, owners, operators and sponsors of infrastructure have to take it much more seriously. They really need to respond.”
Stronati says that the carbon agenda shows the way for other dimensions of sustainability: “Low carbon projects are already linked to opportunity in investors’ minds – this is the next step in persuading investors that sustainable and resilient infrastructure will give a similarly good return.”
Timing of the launch could not be better. “Infrastructure is seen as a more and more attractive way to diversify portfolios and contribute to the financing of real economic growth,” Egler says. “Given the present low interest rate returns and increasing correlation between bond and stock performance, infrastructure, such as a water project with a 4-8% annual return over 30 years, is seen as a good investment, particularly for pension and mutual funds.”
Egler says SuRe can be used at any stage of a project, though the earlier the better, and on upgrades as well as new schemes. Costs of signing up and accreditation are funded from the project budget and users can aim for a standard, silver or gold award.
Over time, the data coming back from the projects means that SuRe will likely be able to demonstrate that using the standard gives a more stable return.
“One thing we hear about from investors is the lack of comparable data on infrastructure project investment and the benefits of investment in ‘sustainable’ schemes,” says SuRe director for standard development Chiara Von Gunten. “SuRe will help gather sustainability and resilience data which will support the comparison of infrastructure projects. For the future that means we will be able to demonstrate a link between sustainability and financial performance.”
Von Gunten anticipates a double windfall through using SuRe. By promoting strong governance and risk management , and a benefits-oriented approach to project set-up, the standard will help investors gain a more predictable and potentially higher return. And in so doing it will allow better use of public resources.”
SuRe is being piloted over 18 months on a variety of live infrastructure projects around the world. “Since the standard was mooted we have had a lot of interest and have been registering approaches at the rate of one or two a week,” Von Gunten says.
Stronati thinks SuRe heralds a sea change in private sector involvement in infrastructure. “Investors will listen and take notice,” he says.
SuRe in brief
SuRe is a voluntary standard but involves independent verification and certification of infrastructure projects.
Its 76 evaluation criteria cover:
Governance: management and oversight, sustainability and resilience management, stakeholder engagement, anti-corruption and transparency.
Society: human rights, labour rights and working conditions, customer focus and inclusiveness, community impacts, socioeconomic development.
Environment: climate, biodiversity and ecosystems, environmental protection, natural resources, land use and landscape.
The objectives are to establish a common language between project developers, financiers, local authorities and end-users, and to promote risk management and a benefit creation. SuRe applies to infrastructure projects throughout their lifecycle and can help gain acceptance for new techniques and technologies alongside recognised best practices.
It defines ‘resilience’ as an infrastructure system’s ability to maintain or recover functionality in the face of stresses and shocks, whether these can be anticipated or not, cutting to the heart of investors’ fears about long term returns.
The SuRe definition of resilience recognises that things can change and that therefore infrastructure must be robust, adaptable, and include redundancy. It also acknowledges that assets are not stand-alone but integrated with other systems.
SuRe provides project developers with a decision support tool to design, build and operate more sustainable and resilient projects, optimising the use of resources and outcome delivery. Certification should help developers to gain licenses to construct or operate.
For financiers the standard makes it easier to evaluate strong investment opportunities.
And for public sector institutions, SuRe helps define project requirements, select schemes and set procurement criteria which make most efficient use of limited public resources.