By Marco Longhini, Analyst, Investment Practices; and Simon Whistler, Head of Real Assets

Photo of Marco Longhini, Analyst, Investment Practices

Photo of Simon Whistler, Head of Real Assets

Four in five PRI signatories that invest directly in unlisted infrastructure say they use ESG factors to identify investment risks across their portfolio, according to our analysis of signatory Reporting and Assessment data.

In 2021, 214 direct infrastructure investors reported to the PRI on their responsible investment activities, and the insights gained from those signatories underline several key responsible investment trends in the asset class. In this blog, we outline some of those findings.

A large majority of these signatories reported that ESG factors helped them identify risks. Additionally, 80% also said they discussed ESG factors at the investment committee level for all of their infrastructure investments.[1]

However, quantifying ESG risks and opportunities remains a barrier for investors. A 2019 report by the WWF highlighted that investors do not incorporate ESG metrics sufficiently in their valuation of infrastructure investments.

And according to our data, at least a third of respondents said such factors didn’t impact their financial assumptions (revenue, capital and operational expenditures, cost of capital) or the price they offered or paid for any of their investments during the reporting year.

Actual practice is nuanced of course, and our findings might reflect the fact that isolating the impact of ESG factors within financial assumptions is difficult, as opposed to infrastructure investors not taking them into account at all.

Nonetheless, the gap clearly shows that infrastructure investors would benefit from better understanding existing leading practice and more tools to improve their ESG incorporation efforts.

Examples of the latter are already emerging: WWF has published a guidance note on integrating ESG factors into financial models for infrastructure investments; while the Coalition for Climate Resilient Investment recently released its Physical Climate Risk Assessment Methodology, which aims to help infrastructure investors integrate physical climate risks into investment appraisal practices.

Signatories are focusing on environmental factors

Our reporting data also shows that infrastructure investors focus most heavily on environmental factors – particularly climate change, rather than the full range of ESG factors that can impact their investments.

For example, more signatories use the TCFD recommendations or other climate-related disclosures (45%) than tools such as the GRI standards (14%), SASB (32%) or GRESB (28%) when analysing how material ESG factors are for their infrastructure investments.[2]

This is understandable to a certain extent. Not only because of the regulatory, client and public focus on the topic; but because infrastructure investors can be at the very forefront of the global transition to a low-carbon economy, investing in and delivering renewable energy and other critical infrastructure to support decarbonisation.

However, it is important that are other factors are not left to one side.

For example, gaining and maintaining a social licence to operate continues to be an essential element of infrastructure investing, perhaps more important than ever, given the economic and political dislocations occurring around energy security, the energy transition and high inflation, among other factors.

Stakeholder engagement is a crucial step in this process: insufficient and inadequate engagement can lead to construction delays, and interruptions to the operation of an asset, thereby affecting the size and likelihood of future cash flows.

As shown in the figure below, many of our infrastructure signatories report that their responsible investment policies included guidelines on how they engage stakeholders – from the workforce of their assets to external parties such as contractors, governments, local communities and end-users. But work remains to be done to ensure that infrastructure investors systematically engage stakeholders throughout the investment process.

Figure 1: Percentage of infrastructure signatories covering the following guidelines within their RI policies (INF 1)

Chart showing the percentage of infrastructure signatories covering specific guidelines within their responsible investment policies.

Such gaps are likely to come under increased scrutiny, given the growing regulatory and client demands on investors to meet their obligations in upholding human rights. The UN Guiding Principles on Business and Human Rights (UNGPs) require investors to consult meaningfully with stakeholders as part of their human rights due diligence processes[3] – not doing so can create potential reputational and legal risks for them.

To this end, the PRI has started developing guidance for private market investors on implementing the UNGPs, which will address areas such as stakeholder engagement.

Formalising the asset owner – investment manager relationship

A final theme to highlight is the extent to which commitments on responsible investment are being, or will need to be, formalised in legal agreements between asset owners and their investment managers.

With groups such as the Net Zero Asset Owners Alliance, which brought together 78 members representing US$10.8trn in AUM as of 24 October 2022, becoming more prominent, asset owners will increasingly require their external managers to make commitments that are compatible with their own.

Our data shows that many infrastructure signatories are already incorporating responsible investment provisions into fund terms, with around 51% of respondents incorporating such commitments into Limited Partnership Agreements as a standard, default procedure in 2021.[4]

However, for those commitments to be effective, asset owners’ and managers’ incentives need to align, and asset owners need to have a clear escalation strategy in place to penalise managers that do not fulfil their responsible investment commitments.

On the first point, the data suggests that the majority of the 151 indirect infrastructure investors[5] that reported last year already assess external managers against a range of responsible investment criteria for all their investments, including aspects of firm culture such as managers’ incentive structures, during their selection process (Figure 2).

Figure 2: Proportion of indirect infrastructure investors assessing aspects of their external managers’ organisations against responsible investment criteria (SAM 3)

Bar chart showing the proportion of indirect infrastructure investors assessing aspects of their external managers' organisations against responsible investment criteria.

On the second element, we observe that close to 90% of indirect infrastructure investors report having a formal escalation process in place, and just under 50% of respondents include divestment within these processes.[6]

Figure 3: Actions that indirect investors (or their investment consultants) include in their formal escalation processes (SAM 22)

Bar chart showing the actions that indirect investors (or their investment consultants) include in their formal escalation processes (SAM 22)

With a growing secondary market, divestment is an increasingly credible threat. Over the next four years, the market for infrastructure secondaries could exceed US$15bn – more than twice what it was last year, according to IPE.

The reasons for manager escalation need to be agreed on during the appointment phase and will vary depending on the indirect investor’s own responsible investment approach.

They could include, for example, not consistently incorporating incentives to improve ESG performance in portfolio companies’ management remuneration schemes. Less than half of our signatories say they do this for their infrastructure investments, with the number decreasing to 10% when looking at those headquartered in emerging markets.[7]  

Signatories are making progress, but there is room for improvement

Overall, there is much to be positive about when it comes to responsible investment in infrastructure. Our formal, and informal, interactions with signatories increasingly highlight that they are committed to the concept of sustainable infrastructure – projects that support key sustainability outcomes such as net zero or that manage ESG risks such as worker health and safety and corruption.

Nonetheless, as our reporting data suggests, there are still areas where more can be done – we will continue to support those signatories that wish to strengthen their responsible investment practices in infrastructure.

View our work programme on infrastructure


The PRI blog aims to contribute to the debate around topical responsible investment issues. It is written by PRI staff members and occasionally guest contributors. Blog authors write in their individual capacity – posts do not necessarily represent a PRI view.