Investing for positive environment impact, financial return

Directing capital towards infrastructure companies that can have a positive environmental and social impact and as well as financial returns is the way to drive change, according to First Sentier Investors.

Rebecca Myatt, portfolio manager for First Sentier’s Sustainable Listed Infrastructure strategy explained their strategy of investing in companies that are actively reducing their carbon emissions footprint and deliver affordable clean energy. The largest sub-sector within the global listed infrastructure universe is the electric power sector, which “is leading the way by reducing emissions” by closing coal plants and replacing generation capacity with renewable energy.

First Sentier’s Sustainable Listed Infrastructure has identified relevant Sustainable Development Goals (SDGs) that link to that thesis.

“We think about the key SDGs that infrastructure can offer,” Myatt said. “One of the largest ones is affordable clean energy. The other ones are around responsible consumption/production, climate action, sustainable cities, and clean water and sanitation. Those themes run through the portfolio.”

First Sentier has identified SDG thematics in the sustainable infrastructure fund, but Myatt noted that disclosure of data relating to the underlying targets of the specified goals is “patchy,” and requires significant analysis to determine material relevance.

“Everyone likes to do carbon data, but it doesn’t always give you the right answer,” she said. “If you look at an oil pipeline, just on the basis of carbon emissions, it would do really well, but that goes against what we would be doing within a sustainable portfolio. The emissions don’t sit with the pipeline, it sits with the consumer of oil i.e. the transportation sector. If you take a narrow focus, you miss things.”

Engagement is central to the process of determining information, she said.

“This is why we have sector specialists” she said. “We determine what information you have in one company versus another company, to piece that all together in a jigsaw. We do contract with some external providers, but we see it as our job to engage with companies to disclose better and provide guidance around information that we would see useful.”

In the infrastructure sector, there is a growth in uptake of the Task force for Climate–Related Financial Disclosures (TCFD) guidelines and the Sustainability Accounting Standards Board (SASB) standard, and Myatt noted that as many companies in the portfolio are listed in the US, the Edison Electric Institute has developed reporting standard relevant to the utilities sector.

“What we tend to look at more is, who are the companies, what do their generation portfolios look like now, what do we think that energy generation looks like in future, and what has the company said about net zero, and how far away from that are they,” she said.

First Sentier incorporates ESG data throughout their investment process, which means that ESG data is an integral part of their Listed Infrastructure Fund as well as the Sustainable Listed Infrastructure strategy.

“The core difference between the two is that the sustainable strategy is slightly more concentrated,” Myatt said. “One of the sectoral differences between the two funds has been that we haven’t owned oil pipelines. That’s probably the largest difference. The reason is that the oil pipelines rank lower on our sustainability analysis because of their environmental factors, and because a lot of them sit in [master limited partnership] MLP ownership structures which are complex and have poor governance characteristics. You see that there is a strong risk of stranded assets in that sector, which has kept us from investing in that.”

One area that First Sentier sees potential for tremendous growth relates to the electric vehicle sector.

“From an infrastructure perspective, we’re looking at investment into the transmission and distribution network to enable EVs, because you’re going to have charging stations in different places on the grid, where they weren’t there before. There’s a need for reinforcement of the grid to allow for further electrification. Will utilities be able to own the charging stations? That’s a debate with each individual company and their regulator.”