IIGCC provides framework to investors for decarbonising “critical asset class”.
The Institutional Investors Group on Climate Change (IIGCC) has published new guidance for asset owners and managers to align their infrastructure assets with a net zero by 2050 pathway.
Open for consultation until 8 July, the guidance outlines the scope of infrastructure assets to be considered for measurement and management as part of a net zero investment strategy. It also includes metrics and targets to track alignment with the Pars Agreement goals over time, and implementation actions to achieve net zero targets in the real economy. The finalised guidance will be published in Q3 2022.
Infrastructure assets are physical facilities, systems and networks that provide or support essential public services, such as bridges, roads and sewer lines.
According to Sean Shepley, Investment Specialist at IIGCC, infrastructure is a “critical asset class for reducing real-world emissions”, which provides investors with “direct” opportunities to invest in tangible real-world climate solutions.
Shepley told ESG Investor: “A road or rail link to a rural area can have a transformative impact in bringing certain groups into a network, that otherwise would have been disadvantaged by their geographic location. Similarly, the provision of water and sewerage has important health benefits. There’s no doubt infrastructure can provide a public good.”
The proposed guidance is the latest component of the IIGCC Paris Aligned Investment Initiative (PAII) Net Zero Investment Framework, first launched in 2021. More than 50 asset owners have signed up to the PAII’s Net Zero Asset Owner Commitment, which includes the adoption of NZIF to decarbonise their investments across listed equities, corporate fixed income, sovereign bonds, real estate and private equity.
NZIF is used by signatories of the Net Zero Asset Managers initiative and the Paris Aligned Asset Owners.
Transitioning infrastructure assets
The IIGCC report noted that there is no “off the shelf” methodology that fully allows for a straightforward approach to measuring the current and forward-looking net zero alignment of an asset or fund for infrastructure.
The IIGCC’s recommendations draw on existing methodologies and metrics introduced by groups and initiatives such as Chronos Sustainability, the Transition Pathways Initiative (TPI) and the Carbon Risk Real Estate Monitor.
A wide scope of infrastructure assets should be assessed on their net zero alignment, the report said, including unlisted infrastructure companies, project finance, passive infrastructure indexes and funds, and listed and unlisted closed-end and open-ended infrastructure funds.
Broadly, investors should measure and disclose the Scope 1 and 2 emissions of the assets – as well as Scope 3 “to the extent possible”. Further, short-, medium- and long-term decarbonisation targets should be set, with clear governance and management responsibilities for the achievement of those targets disclosed.
However, there are more infrastructure-specific factors which asset owners and managers must account for in their target-setting and decarbonisation efforts, the guidance said.
These include changes in the operations of the asset, such as a fuel switch in power generation, or its carbon efficiency may degrade over time. For the latter, asset owners and managers need to account for the full lifecycle emissions of the asset and include any additional emissions produced from refurbishment activities.
The IIGCC has divided infrastructure assets into brownfield (operational) and greenfield (in construction) assets. Any emissions associated with construction should also be accounted for in targets and decarbonisation strategies, the guidance said.
According to the NZIF guidance, asset owners and managers should aim to gradually increase the percentage of AUM invested in infrastructure assets that are achieving net zero, aligned with net zero or in the process of aligning to net zero to 100% by 2040.
Due to the long-term nature of infrastructure, valuation and other performance characteristics can have a high dependence on government policy and regulation, said Shepley.
“Infrastructure demonstrates very clearly that when an investor makes a net zero commitment, they are dependent on governments upholding their own commitments and for the whole of society to transition too. Therefore, the infrastructure guidance is fully aligned with the overall NZIF and the importance of engaging both corporates and policymakers,” he said.
Asset owners also need to maintain a high-level of engagement with their asset managers, the IIGCC said. This is to ensure managers are “operating” in a manner consistent with the asset owner’s NZIF-aligned targets.
In April, IIGCC launched a toolkit to help asset owners and managers enhance their stewardship practices when engaging with companies on their progress transitioning to net zero. It was developed in partnership with UK pension scheme Railpen.
IIGCC has more than 375 members, mainly pension funds and asset managers, across 23 countries, with over €51 trillion in assets under management.