Dr Rory Sullivan is chief executive and Cora Buentjen is a research analyst at Chronos Sustainability
From smart grids to electric vehicle charging points and clean energy networks, the world will need to invest hugely in sustainable infrastructure in the next few years to meet the Paris Agreement goals — research initiative New Climate Economy calculates that $90tn of sustainable infrastructure investment will be required by 2030. Extra Large Fishing Net
Such figures put infrastructure investors in the spotlight as policymakers prepare for next month’s UN climate summit in Bonn — a major part of planning ahead for COP29 that will be held in Baku, Azerbaijan, at the end of the year.
It is clear from our work with specialist and large multi-asset class infrastructure asset managers that the sector is willing to make net zero commitments. However, many are grappling with how to put those commitments into practice.
Our work has helped us to identify three first steps for investors thinking about net zero targets for infrastructure: tailor the guidance, invest in data, and involve the asset owners in the big climate decisions.
There is a growing body of practical guidance for investors. Notably in the past year, the Institutional Investors Group on Climate Change made its “Guidance for infrastructure assets” available, and the Net Zero Asset Owners Alliance provided detailed thoughts on net zero targets with its “Target-setting protocol fourth edition”.
These are important foundation stones helping to standardise target-setting for infrastructure assets. But it is down to each individual investor to interpret this guidance — and that is where the rubber is hitting the road on climate change for this asset class.
The challenges of net zero alignment for a UK wind farm, for example, are very different from those for a new toll road across the US, and translating this emerging guidance into specific scopes, timelines and data collection requirements will require each individual investment house to look at the detail on an asset-by-asset basis.
Whether the asset is a road, railway or renewable energy farm, the most valuable step for any infrastructure investor is to produce reliable greenhouse gas emissions inventories for their assets. Without an accurate carbon footprint, it will be impossible to set realistic emissions reduction targets to determine which assets to prioritise engagement with, or to credibly and robustly track and report performance over time.
Such inventories need to be developed on a bottom-up, asset-by-asset basis. This is not a trivial undertaking as investors need to collect emissions data directly from assets and then invest time in reviewing and checking these data.
A well thought-out and robust process is needed to do this properly. It should be:
repeatable: inventories should be conducted regularly and consistently through annual surveys. Asking the same questions year on year is important in determining trends over time. It is good practice to maintain consistent units and scope boundaries to ensure comparability;
accurate: data must be carefully reviewed and compared with peer data in order to verify the quality of the data provided. In some cases, where data remains unavailable, proxies can be applied as long as they are relevant;
easy to review: any assumptions used within the inventory — for example, relating to proxies — fuel types or emissions factors should be clearly documented and justified.
The cost of inventories, particularly in year one — where one-off costs to define scope, develop data tools and the like are required — is not insignificant. However, our experience suggests that initial costs are outweighed over time by the benefits of better data quality, and the efficiencies gained as assets and projects become acquainted with the process.
The critical nature of many infrastructure assets means the ultimate owners are often governments or large institutions such as pension funds. This is particularly important when ownership structures mean the decisions on what actions are to be taken (and who pays) sit with these ultimate owners of the assets.
For example, in public-private partnerships, which may include assets such as hospitals and schools, the investors who manage the asset on a day-to-day basis often have limited authority to take actions such as implementing new energy efficiency measures.
Another issue relates to what happens at the end of the fund term — are the assets to be handed back to the original owner or will the investor be looking to sell or refinance the assets?
The Net Zero Asset Managers initiative points to the importance of asset managers being willing to engage with the asset owners to make the financial case for funding long-term and potentially expensive decarbonisation (such as retrofitting) in some assets.
Different Types Of Fishing Nets Ultimately, investors’ approaches are likely to be iterative and experimental in the early stages of target-setting. It will take time, but as climate delegates in Bonn will no doubt reinforce next month, this work could not be more critical. The infrastructure we create and manage today will form the foundations of the low-carbon economy of the future.