Applying Principle 1

Incorporating ESG refers to both the approach of the investor organisation as a whole, including resourcing, strategy and governance, and to how the organisation’s approach to ESG incorporation is implemented in the investment process. Some of the ways investors can implement Principle 1 are described below.

Responsible investment in organisational governance, policy and strategy

• Organisational governance: Train and educate staff to consider and integrate ESG into decision-making throughout the investment process (including due diligence, post-investment monitoring, value creation activities, and risk and compliance monitoring).
• Policy and strategy: Formalise your ESG approach into a policy. Many investors will have an organisation-wide ESG policy that covers all asset classes. Adapting this into a specific policy for infrastructure will help align expectations and practices on responsible investment in infrastructure. A policy covering all asset classes is likely to leave space for interpretation on its application to infrastructure. Integrate the responsible investment policy into a practical implementation strategy so that investment professionals are equipped with practical methods for living up to the firm’s policy.
• Portfolio construction: Incorporate ESG matters into asset allocation and portfolio diversification (e.g. asset concentration issues with respect to climate change risk, leverage).

Integrating ESG in indirect infrastructure investment (funds)

• Investor selection of fund managers. Incorporate ESG in due diligence when selecting infrastructure fund managers, including requiring managers to disclose how they will incorporate ESG factors into their investment decision-making, monitoring and reporting processes. Request examples from previous funds - or in the case of new managers, from individuals’ previous roles. Refer to existing PRI guidance in the appendix.
• Assess or rate managers on their approach to integrating ESG analysis, where appropriate, into risk frameworks and the investment decision-making process. This can help investors evaluate overall alignment with their responsible investment policy and encourage fund managers to improve their ESG integration.
• Fund manager appointments. Request the incorporation of ESG provisions in fund terms, including Limited Partnership Agreements and side letters. Refer to existing PRI guidance in the appendix.
• Fund manager monitoring. Use ESG topics covered during selection, as well as the provisions included or discussed when agreeing fund terms, as a foundation for monitoring ESG considerations. Request periodic reports on engagement activities and ESG performance. Set clear expectations for when and how the fund manager should report material, adverse ESG incidents. Provide examples to illustrate what you consider severe and what constitutes a material ESG incident.

Linking ESG integration to outcomes

A small number of PRI signatories reported in 2017 on the voluntary indicators relating to ESG and financial performance in the Direct Infrastructure module of the PRI Reporting Framework. The graph below shows the perceived links between ESG integration and investment outcomes both in terms of financial performance and the ESG performance of the fund or portfolio as a whole.

Integrating ESG in infrastructure investment (direct)

• ESG requirements in the investment policy and process. Set requirements for completing environmental and/or social impact assessments and fulfilling ESG criteria in different phases of the investment process (primarily due diligence and ownership) using third-party expertise if necessary.
• Origination. Consider potential current and future exposure to ESG risks and opportunities in your investment universe when sourcing investment opportunities. This can include technology; site; engineering, procurement, and construction (EPC) contractors and suppliers; region; sector; regulatory and policy environment; and impact targets of relevant stakeholders. It can include your ability to deal with these risks and seize these opportunities across the field of potential investments.
• Screening. Include ESG risks in exclusion checklists and as mandatory parts of screening reports and pre-investment approvals. Screening should identify any potential ESG deal breakers and can also be used to detect ESG factors to be explored in detailed due diligence. Possible considerations include reputational concerns such as human rights abuses and harmful environmental practices.

• Due diligence. Given that ESG considerations can have both a positive and negative impact on returns, treat ESG matters like other aspects of due diligence by assessing risks, the ESG track record of the business or asset, and opportunities. Consider ESG factors throughout the full life cycle of the business (development, construction, operation, maintenance, decommissioning), including an assessment of impacts and risks in the supply chain, such as manufacturing and transport.
• Preparing for post-acquisition activities. On the basis of due diligence findings, create management and remediation strategies for material ESG risks, including mitigation, pricing, transfer and monitoring. Include any ESG opportunities for increased returns in a post-acquisition value preservation and creation plan. The consideration of both material ESG risks and opportunities for value preservation and creation in post-acquisition plans can be made a condition of Investment Committee approval. Where risk mitigation is not possible, consider declining the investment opportunity.
• ESG in valuations and transactions (including exits). Attribute value to ESG factors throughout the life cycle of the investment, including potential ESG incidents, issues and impacts, to encourage the consideration of ESG costs and associated benefits.

Other considerations

• Minority shareholders and debt investors. When investing as a minority shareholder or lender, undertake ESG due diligence on the lead sponsor, its dialogue with the management of the infrastructure business and its existing ESG approach. Assess whether the majority shareholder is aligned with your views on responsible investment and whether it is willing to listen to minority shareholders or debt investors..
• Fundraising. Incorporate ESG into your offering documents, specifying the role of ESG factors in your investment strategy and describing how you have integrated ESG throughout the investment process, including pre-investment activities, post-investment activities, and reporting to investors. Make your ESG policy available to existing and prospective investors.