Sonen’s webinar, Investing in Sustainable Infrastructure, is available for replay.
This webinar is part of Sonen’s continuing series of Impact Frameworks, we develop to guide our investment process and present to clients interested in specific impact themes. Also included are responses to an additional 12 questions that are not on the replay.
- How do you foresee sustainable infrastructure being affected by the Trump administration?
As we noted in our remarks, we are not aware of an explicit sustainability mandate within various proposals for infrastructure spending.
Our examination of the top 50 projects (located here, McClatchy’s Kansas City Star) reveals top of mind infrastructure projects. There are a handful of notable exceptions for wind energy, hydropower, and rail transportation – but again, no explicit call for sustainability-minded infrastructure projects.
Re-opening the debate about Keystone XL is a great example of an infrastructure project that we feel does not adequately consider long-term negative climate impacts. Keystone XL would deliver fuel produced in Canada’s tar sands region, an extremely carbon-intensive process that entails significant environmental damage. According to the US EPA, “Construction of the pipeline is projected to change the economics of oil sands development and result in increased oil sands production, and the accompanying greenhouse gas emissions, over what would otherwise occur.”1
As we noted during our webinar, much of the impact opportunity coming from infrastructure investing is located in the global South, where 66% of all this project spending will occur. It’s difficult to ascertain the priorities that local governments and multilateral institutions place on sustainability in this case, but our market scan reveals potentially significant opportunities for investing in more sustainably-minded infrastructure projects in these geographies.
- With ~66% of new infrastructure being in the Global South, is that where you anticipate allocating capital over the next 15 years?
Sonen’s investment strategies are globally oriented, and we will invest where the financial profile and impact profile is most appealing. We are currently invested in a number of utility-scale renewable energy projects in Ethiopia, Uganda, Tanzania, Indonesia, the Philippines and India and we anticipate making further allocations in these markets where projects (or technologies and processes) are aligned with our financial and impact goals.
- There is an apparent emphasis on public funding options, e.g. bonds. Are you also investing in the contractors who will be implementing those bond initiatives?
Our sustainable infrastructure investments currently include securities in public equity, fixed income and real assets. Depending on the asset class, we may occasionally have exposure to contractors doing infrastructure-related work, or providing a related service, but that is incidental to a larger investment strategy.
- For the social impact, are you assuming that urbanization should be the development path developing countries should take?
We do not necessarily have a preference on whether countries should urbanize or not. The empirical data and forecasts we follow suggest that this is an irreversible and growing global phenomenon. In the context of this reality, we focus on how urbanization will take place, and how infrastructure can better serve these growing urban communities, both by expanding necessary services, and by improving underlying sustainability performance.
- How important is optimization in the process? Does your focus on urbanization take precedent in investment decisions? As it looks now the big cities are confronted with huge issues now.
When we referred to optimizing our investment decisions, this refers to integrating both potential financial performance and impact performance during the evaluation process of a particular investment. As a result, we do not consider investments with high financial return that have little impact. Nor do we consider high-impact investments that we believe will financially underperform. Our conviction that investing to generate financial returns and lasting social and environmental impact are compatible and mutually reinforcing objectives.
Urbanization is indeed creating the need to manage an array of social and environmental challenges. But this is precisely why we think that future investment in infrastructure, if executed thoughtfully, can provide an enormous improvement in the quality of life for urban denizens, and simultaneously proactively manage environmental challenges such as climate change, waste and pollution.
- How do you see instruments such as social impact bonds being used for investment in sustainable infrastructure, for example, social housing?
Social impact bonds are a worthy mechanism to provide much-needed finance for many kinds of projects, which can include social housing. Typically, social impact bonds connote a ‘pay for performance’ element, which means returns to investors are variable depending on the success of a given project. While Sonen has been a participant in social impact bonds on behalf of some of its clients, namely the very first bond of this type in the UK, they are not typical investments among our strategies.
Green bonds, which provide finance to projects with specific, measurable social or environmental outputs, are also increasingly common and can be an excellent mechanism to provide finance as well as to guarantee specific impact performance. Such green bonds are commonplace in our fixed income strategies.
- How about potential agriculture infrastructure projects, like vertical indoor urban farming?
Agriculture-related investments are not an explicit focus of this framework, although we recognize that sustainable food production is an essential component to sustainable social and economic development. To that end, please refer to our impact framework on Sustainable Agriculture. In this framework, we spell out our intended impact outcomes relating to investments in agriculture, which include:
- Improving food security
- Meeting global nutritional needs
- Improving environmental sustainability.
Impact objectives for sustainable agriculture included in this framework include proper management of nutrients, reducing GHG emissions from agriculture, reducing water use and reducing crop production for non-food uses. Each of these objectives would be met by such an indoor farming scheme.
- The new administration has suggested “less regulation” for developers. Are environmental measures that serve to preserve and restore the environment, like the Clean Water Act, in jeopardy of changing under this infrastructure push?
Reducing regulation could result in lower environmental standards. It is not yet clear, however, if the effort to simplify the regulatory environment is necessarily connected to increased infrastructure spending. This is something we will be closely monitoring.
- How does Sonen Capital work with municipal zero-waste initiatives like NYC’s “zero waste by 2030”?
We are big supporters of the idea of zero waste and have a number of investments in companies that are embodying the so-called “circular economy.” Our participation in such initiatives vary depending on the asset class and investment strategy.
In fixed income, we own various bonds issued by municipalities that finance entire facilities or update technology that manages municipal solid waste, in some cases boosting recycling rates and moving toward zero waste.
In public equity, our exposure would typically take the form of a company that is developing or disseminating a technology, product or service addressing waste management, and whose customers may be such municipalities.
In real assets, we seek physical assets that may be managing waste for a city or a region, and whose impact is consistent with the various outcomes that we reviewed during the webinar. In our view, Zero Waste is indeed achievable and belongs squarely among the universe of potential investments in sustainable infrastructure.
- When considering a potential infrastructure investment, does Sonen Capital take into account the political risk of a particular country, for example, violations in human rights standards in that specific country?
Yes – our investments across asset classes take into consideration non-financial dimensions, often referred to as environmental, social or governance (ESG) considerations. And when investing in emerging markets, political and economic risks must be taken into account as these often constitute sizeable risks to any financial investment’s performance.
Sonen will be publishing a paper on human rights and clean energy development during the Ceres 2017 San Francisco conference, held on April 26 and 27 of this year.
- How does sustainable infrastructure and sustainable real estate overlap?
There are many areas of overlap between sustainable infrastructure and real estate. Often, real estate, or the built environment, is included within the broad topic of ‘infrastructure’ but we decided not to include it within this specific framework, largely because we consider them distinct from one another (especially because their financial drivers are different). We’ve also separated the two topics because of their distinct impact potential:
- The built environment is the single largest source of carbon emissions, and there are inarguable social needs (namely affordability) that must be addressed as impact investors consider real estate investments.
- And infrastructure, with a global projected $90 trillion spend by 2030, presents a massive opportunity for positive social and environmental impact creation.2
But the impact opportunity for each lies in very different physical assets: Buildings in real estate as opposed to other kinds of physical assets in infrastructure (transit systems, waste management assets, water systems and natural-based infrastructure, for example). Because the underlying investments are so distinct, we bifurcated the two broad topics and address each separately.
You will note, however, that our intended impact outcomes in sustainable real estate are similar to the intended impact outcomes for sustainable infrastructure:
|Sustainable Real Estate||Sustainable Infrastructure|
|Intended Outcomes||Increased social equity and accessibility in the built environment||Increased social equity through improved access and affordability of modern infrastructure|
|Enhance the built environment’s sustainability performance||Low carbon development strategies for new and existing infrastructure delivered at scale|
|Increased conservation of natural resources and lower-cost infrastructure development|
Underlying impact objectives for each intended outcome are spelled out in each framework, and are intentionally designed to complement one another and provide greater synergies through diversified impact investment portfolios.
Examples of specific investments in Real Estate and the metrics we track in our investments are available in Sonen’s Annual Impact Report, which we publish annually each spring (currently planned for April, 2017).
- How do you incorporate carbon-pricing in your investment risks and pricing?
We anticipate that carbon will eventually be priced accurately among financial markets. And apart from our belief that climate change must be addressed meaningfully and in short order, we are signatories to the Divest/Invest initiative and do not hold any assets that are subject to the stranded assets possibility. Because we don’t have exposure to fossil fuels, we believe our portfolios have little carbon-pricing risk in them.
Potentially, given our exposure to renewable energy solutions and other low carbon solutions, it is likely that a carbon-pricing regulatory regime would benefit our portfolios.