Infrastructure investment decisions have always been about risk and return. How much will it cost to build a bridge, and will enough people use it to make it worthwhile? How long before a power plant pays for itself? Now they are increasingly about something else too: the environmental footprint of the assets being bought and built.
Building and operating infrastructure accounts for more than 60% of global greenhouse gas emissions, making it one of the most consequential arenas for sustainable investment. In our joint report with WWF, Incorporating Sustainability Into Infrastructure, we examine how the biggest infrastructure investors in the world are thinking about climate and nature considerations, and what opportunities that opens up.
Governments and international bodies such as the UN have been pushing investors to take environmental risks more seriously for years, and private capital is responding. The Paris Agreement committed more than 70 countries to net zero emissions by 2050, and the UN Principles of Responsible Investment has since been signed by more than 3,000 organizations including pension funds, sovereign wealth funds, and asset managers.
Every single investor we surveyed uses environmental, social, and governance (ESG) scoring frameworks of some kind, and the motivations are straightforwardly commercial. Financial returns ranked as the primary driver, followed by risk management and brand reputation, suggesting that sustainable investing has become a core part of investment strategy rather than an afterthought.
Sustainable infrastructure is becoming the smarter financial bet
The financial case is compelling. Our research shows that integrating ESG factors into investment decisions can improve returns through lower cost of capital, stronger operational performance, and higher stock prices. For long-term infrastructure investors, sustainability risks can affect cash flows and valuations over decades. The cost of sustainable infrastructure is falling too. In 2019, most newly built renewable power plants were already generating electricity more cheaply than existing coal plants, before accounting for the carbon taxes that fossil fuel operators increasingly face.
Within the investment process, ESG considerations tend to enter at two points: when an asset is being assessed before purchase, and after the investment is made. More than 60% of investors we surveyed track the ESG performance of assets they already own, often through centralized dashboards that flag emerging risks.
Investors are also becoming more willing to engage with assets that would once have been rejected outright on environmental grounds. Funds are increasingly willing to back companies with a credible plan to clean up their act, rather than simply avoiding them. One fund profiled in our research invested in a coal-fired power plant specifically to accelerate its conversion to gas, with a longer-term plan to build a solar farm on the site.
Carbon pricing and climate risk are changing infrastructure valuations
Greenhouse gas emissions and energy and resource efficiency are the factors investors focus on most. In sectors like power generation, transport, and water utilities, a growing number of investors now put an internal price on carbon, effectively treating future emissions as a financial liability when they assess whether an asset is worth buying.
The physical effects of climate change are also climbing up the agenda. Investors in telecoms, utilities, and transport own assets that are built to last decades, and those assets are increasingly exposed to floods, rising sea levels, and extreme heat. One investor walked away from a gas distribution network with strong financials after climate modelling showed that heavier snowfall would make the pipes increasingly difficult to maintain.
Biodiversity is the hardest ESG factor to act on, because it is so difficult to measure. Carbon emissions can be counted and priced, but the impact of a new road or power line on local wildlife and habitats is far harder to put a number on. Progress is being made, though, and one promising example is the UK government working with investors to develop a standardized biodiversity impact calculator, with several investors already planning to pilot it across their portfolios.
Sustainable infrastructure is now a defining investment opportunity
Not all investors approach ESG in the same way, with two broad approaches being followed. Smaller and more indirect investors such as pension funds and sovereign wealth funds tend to rely on frameworks developed by bodies such as the UN and the Financial Stability Board, often bringing in outside consultants to do the analysis.
Direct infrastructure specialists and multilateral development banks go further, and combine those external frameworks with in-house tools built to assess an asset’s specific ESG footprint. The European Investment Bank, for instance, puts a price on carbon for every project it considers and factors in the cost of air pollution, effectively treating environmental damage as a financial cost from the outset.
What is becoming clear is that sustainability and financial returns are pulling in the same direction. Investors who once saw the two as being in conflict are increasingly finding that buying a less sustainable asset at a lower price and improving its environmental performance can deliver real financial gains as the asset becomes more attractive to other investors.
The main obstacles are practical: data is patchy, standards vary across markets, and there is no common benchmark for what good looks like. Closing these gaps will require collaboration between investors, governments, and organizations – and the investors who treat sustainability as an opportunity, not an obligation, will stand to gain the most.
