Infrastructure debt has ESG in its sights

Vehicles operating in the space are increasingly targeting sustainable projects due to LP demand and goals set by the United Nations.

Infrastructure debt investors are doing more than paying mere lip service to ESG.

Over the past few years, environmental, social and governance- (ESG) focused investments have become an increasing target for private debt firms globally, especially those with an infrastructure focus. This is partly due to 17 different goals the United Nations introduced in 2015 for a more sustainable world, which included infrastructure on the list.

In addition, many limited partners are beginning to become more conscious of where they are putting their money within the vast amount of investment opportunities. Due to these pressure points, some firms are trying to dip their toes into more ESG-focused projects.

However, this has been a focus for many firms for years, and they are delving deeper into the strategy.

NN Investment Partners is one such firm – sustainable infrastructure debt investments have been a key part of its strategy. The firm recently launched its debut ESG-focused infrastructure debt fund on 15 November with a minimum target of €200 million, the firm told Private Debt Investor.

Alistair Perkins, head of project finance for infrastructure debt at NN Investment Partners, told PDI that although this is the firm’s first ESG-focused fund by name, ESG practices are in its “DNA”.

“We want [the fund] to be a market leader and push the envelope a bit more than others have done in ESG and sustainability,” Perkins said.

The NN European Sustainable Infrastructure Debt Fund is expected to invest in infrastructure across social, transportation, energy, utilities and digital infrastructure. The vehicle is offering senior secured loans and expecting returns of between 3 and 4 percent.

Perkins said the firm uses a ratings system for its potential investments to make sure they fit its criteria for sustainable investment.

Vantage Infrastructure takes a similar approach when vetting potential investments. Tim Cable, head of  infrastructure debt and senior partner at Vantage, said that the firm looks at a variety of different factors for each potential investment and then ranks them on a scale from A to E.

The firm also uses a system it calls “360 degrees ESG”. This concept ensures that potential investments are compliant with Vantage’s ESG goals, but also that ESG remains a focus throughout each investment’s entire life cycle.

“Understanding what the issues are and integrating ESG thinking into both acquiring and managing an asset are important things to do,” Cable said.

Cable added that it’s also important to look beyond the obvious; renewable energy shouldn’t be the only focus among sustainable infrastructure projects.

Emma Haight-Cheng, partner and head of infrastructure debt in Europe for Sydney-based AMP Capital, said her firm is currently investing its third infrastructure debt fund and all the funds have followed an ESG-focused strategy.

“From our point of view, a good infrastructure project should be synonymous with strong ESG credentials,” Haight-Cheng told PDI. “Strong ESG performance should be synonymous [with] strong business.”

Haight-Cheng said that AMP Capital recently put a stronger emphasis on ESG and created a more robust system for checking potential investments beforehand for compliance with ESG guidelines.

She noted that firms should not only be focused on this because of the long-term implications and returns, but also because LPs are starting to incorporate questions about ESG into their due diligence.

She said that when talking to LPs from Europe and Canada, the sustainability of an investment comes up frequently. Cable and Perkins said they’ve found the same, with the latter noting that when it comes to Nordic investors, if you aren’t sustainable, you aren’t getting their support.

ESG investing is less of a focus for US-based LPs, according to multiple general partners. However, that may change.

The Principles for Responsible Investing, which is an organization focused on sustainable investment practices, has had more than 2,000 firms commit to more responsible investing since its start in 2006. The majority of new signatories over the past year have come from the US, including LPs such as San Francisco Employees Retirement System and the Seattle City Employees’ Retirement System.

With ESG being a growing part of the conversation and LPs becoming increasingly interested in it, funds and strategies focused on it are also likely to increase.

“We try to keep moving forward,” Cable said. “We want to be a leader, not a participant, when it comes to thinking around ESG.”