FORUM: Sustainability in infrastructure projects
April 2019 | SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE
Financier Worldwide Magazine
April 2019 Issue
FW moderates a discussion on sustainability in infrastructure projects between Benjamin Assante Di Panzillo at Egis, Rahul Agarwal at Invest India, Joanne Emerson Taqi at Norton Rose Fulbright (Middle East) LLP, and Simon Whistler at Principles for Responsible Investment.
FW: In your experience, how do infrastructure planners, owners and designers typically view infrastructure sustainability? What seems to be the common understanding of ‘sustainability’?
Whistler: In general, there is more of a ‘do no harm’ and compliance or risk management approach to sustainability. In other words, infrastructure stakeholders increasingly understand how sustainability factors can impact on infrastructure projects and investments. But the main focus, to date, has been reducing the negative impacts and reputational risks associated with those factors, rather than necessarily seeking out opportunities for value creation or positive impact.
Agarwal: The understanding of sustainability differs by maturity of region and sector. Most infrastructure projects lead to both gains and compromises for sustainability. It is the balance between these gains and compromises that should be the key grounds for approving or rejecting a particular project. For example, a road in developed Europe or the US may never qualify as a green, impactful and sustainable investment. However, the same road in central Africa connecting farmers to markets, increasing livelihood of people and providing them access to basic services, should definitely qualify as such.
Assante: There are two common themes when it comes to sustainability. First, it is mostly about the environment, with issues such as energy management and recycling dominating. Second, the creation of a positive sustainability programme could be hugely rewarding for companies. When both of these themes are combined, even the worst energy plant project can appear more ‘green’.
Taqi: There are clear indications that environmental and social agendas in all projects, including infrastructure, are becoming much more prominent. The motivation for adopting sustainability varies by stakeholder and region, but ultimately, it is driven by the goal of risk management. Risk, as it relates to sustainability, means managing environmental and social performance to avoid, to the extent possible, adverse impacts that imperil desired outcomes. ‘Environmental performance’ – avoiding harm to the environment – is a well-known part of sustainability risk and includes resource efficiency, reduced green house gas (GHG) emissions and pollution prevention, waste management, energy usage and air quality. ‘Social risk’ is about avoiding harm and enhancing the well-being of people. It means keeping people and communities healthy, preparing for emergencies, protecting the rights and well-being of workers, and respecting the rights and interests of indigenous communities. It also means dealing with, and preventing, corruption. A common feature of these risks is that they are readily identifiable and manageable through good practices.
“Addressing long-term viability and resilience is not something infrastructure practitioners can do in isolation from other players in the system. It is more about creating a system that can better support these objectives.”
FW: Do you believe infrastructure players need to review and expand their approach to sustainability? What might this entail in practical terms?
Agarwal: The definition of sustainability is going to increase significantly over the next decade. From a finance perspective, the impact of these changes will lead to an increase in upfront costs as well as maintenance of infrastructure. However, this change will ensure that infrastructure players – planners, designers, financiers, users and governments – will need to rewrite all their processes by implementing best practices and constantly evolving. It is also important to note that the understanding of sustainability as a risk mitigation mechanism for achieving desired objectives is mandatory across all infrastructure players, and not just as a regulatory obligation.
Assante: Achieving sustainability requires a more holistic approach, which, in turn, provides companies with an opportunity to rethink their operations. For instance, road infrastructure provides transportation services. But what else? Energy? Digital infrastructure? Food? Biodiversity? Infrastructure players are already the backbone of many economies; going forward, they must help those economies with their transition toward sustainability. When public-private partnerships (PPPs) are involved, these factors must be considered when the contract is drafted.
Taqi: More emphasis is being placed by governments, financial institutions and project proponents on sustainable infrastructure development, and on measuring sustainability through standards and ratings. Primary concerns for many project proponents include claims for adverse environmental and social impacts, or managing direct action by affected communities, as happened on the Dakota pipeline. Financing institutions are increasingly aware of the financial, legal and reputational risks that delayed or thwarted projects represent, and they are demanding a much more involved approach to governance of environmental and social issues by borrowers. Export credit agencies in particular have a keen awareness of sustainability issues and they are driving up the standards on specific projects in which they are involved. These pressures are contributing to the ongoing development of international standards, such as the ‘Equator Principles’, which are currently being updated. The IFC’s Performance Standards are likely to follow suit. Commercial banks and development financial institutions are responding by reviewing their sustainability policies, and, in some instances, creating their own bespoke sustainability frameworks that reflect the character of their own portfolios and the risk appetite in different industries. Some are also including environmental and social risk governance structures and remedies in their lending documentation.
Whistler: There is a growing sense that infrastructure players need to think about sustainability more systematically in terms of those elements of value creation or protection, and positive impact. This needs to be addressed in different ways. It requires better datasets on the impact of sustainability factors on infrastructure asset performance to help inform investment and planning decisions. It needs more consistent expectations on sustainability performance among policymakers, and it needs regulators to facilitate better planning and design. It also needs better understanding among infrastructure players about what sustainability really means for the asset class – more tools and ideas on how impact can be incorporated into design and outcomes measured, or to support scenario planning to underpin assumptions around resilience.
“The concept of environmental and social sustainability needs to be ingrained into every element of the design, financing, planning, building and operation of the infrastructure in question.”
FW: How can infrastructure practitioners go beyond the engineering and costing aspects of their projects to address long-term viability and resilience?
Assante: For infrastructure practitioners, going beyond the engineering and costing aspects of their projects, long-term, carries a financial burden, no matter the term or resilience. What we are discussing here is risk management: do we want to spend time and money in the first place to identify risks, mitigate them and prepare a backup and restore solution in case it happens, or do we want to deal with the consequence unprepared when it happens? Do we want to identify opportunities for additional value in the project? The more the responsibilities are clustered along the project life cycle, the less the project can address long-term viability and resilience.
Whistler: Addressing long-term viability and resilience is not something infrastructure practitioners can do in isolation from other players in the system. It is more about creating a system that can better support these objectives. It needs governments to step up to the plate from a legislative and regulatory point of view, including pricing environmental, social and governance (ESG) issues to the point that they are material to cost considerations and the fundamental ways essential services are delivered – for example shifting transportation systems from personal transport to mass transit. It also needs engineers and construction firms to take their sustainability practices even further and it needs financiers and investors to build stronger consideration of sustainability into their financial models and requirements of projects.
Taqi: The financial sustainability and long-term viability of projects is often tied directly to the management of ESG issues. It, therefore, must be part of the initial planning and due diligence performed before any investments are made or ground is broken. Environmental considerations – climate change risk in particular – and increasingly social issues inform, to a great degree, both the technical parameters of the project, as well as the processes which need to be implemented in relation to the affected communities, labour standards, security, supply chains, and so on. Timing is critical. Certain environmental issues may need to be considered in financial modelling, and the economics of a transaction may be affected by material compliance costs or other environmental obligations. Legislation, standards and principles that are required to be followed with regard to environmental and social issues should not be a ‘tick box’ exercise but rather should be viewed as a way in which to change attitudes and behaviours.
Agarwal: Infrastructure projects are high upfront investment – long gestation projects due to which investors remain the most critical stakeholders to any project. In this environment, the smallest of risks can impact the overall project and lead to significant losses for investors. It is therefore necessary for practitioners to adopt frameworks to address these risks during project preparation and due diligence. An ESG framework provides an excellent approach to address the long-term viability of infrastructure. A number of tools and standards are now available for greater compliance for ESG issues. Diligent adherence to these standards will significantly reduce the risks associated with a project and bring overall costs down.
FW: How might a more holistic approach to asset design and development help facilitate project sustainability? How would you characterise the role that governments have to play in this regard?
Taqi: Truly sustainable infrastructure requires the motivation, collaboration and commitment of all stakeholders. The concept of environmental and social sustainability needs to be ingrained into every element of the design, financing, planning, building and operation of the infrastructure in question. Considering the potential negative impacts of a project holistically allows the environmental issues to be aligned and considered with social issues. Certain environmental and social issues cannot be completely avoided, but require an action plan to mitigate them appropriately. Substantive action may involve wider economic and social structures and plans – for example by ensuring that project proponents establish and execute plans that have been reached in consultation with local indigenous communities. Governments have a fundamental role to play, not only in introducing legislation that imposes substantive ESG obligations on stakeholders, but also in promoting transparency through the imposition of reporting obligations. Ultimately, they may link non-financial performance of companies to directors’ duties, and incentivise the right behaviour through tax regimes.
Agarwal: Most emerging economies witness infrastructure demand outpacing infrastructure development, leading to fragmented infrastructure delivery. The fragmentation of infrastructure delivery is one of the biggest reasons for unsustainable development. This significantly hinders the capacity enhancement process and defeats overall objectives. In addition to this, it is also common that the interoperability of various agencies significantly slows down development and increases costs. For decades, highways and railways in India have faced these issues, leading to significant delays. Holistic infrastructure planning and development can not only lead to long-term sustainable development, but can also reduce costs, improve service delivery and enhance the life of an asset.
Whistler: A deeper focus on sustainability needs to be built in from the outset of any project. It is much harder and often more expensive to build-in sustainability – whether it is more resilience to climate events, the re-establishment of good relations with communities or stronger governance frameworks – after the event. Governments have an essential role to play in order to facilitate this, whether through their long-term strategic infrastructure planning and defining the role that sustainable infrastructure will play in a country’s future, or through creating the right legislative and regulatory frameworks that mandate and incentivise more sustainable infrastructure projects, including the design and financial elements of this. Fundamentally, governments need to price things like ecosystems services into their cost and benefit models, and design of infrastructure pipelines. The short-sighted view is to see the simple benefit of mass transit to direct users, whereas the more holistic view is to price in the benefits of clean air, reductions in road maintenance costs, benefits of more green space in cities, and so on.
Assante: Regulations can provide a relevant framework for cooperative design and development. Adequate time must be taken during the preliminary studies to define the initial programme and to assess the possibilities of implementation through a multi-criteria analysis. Eligibility to access public financing or ‘green funding’ must relate to a ‘sustainability rating’. Governments must ensure that their approach to promoting synergy is applied consistently, that investments are made in the right areas and that sustainability is periodically assessed.
“Planners of infrastructure need to track changes closer than ever before, hence the need for a multi-discipline approach based on technology evolution, climate change, socioeconomic changes and consumer demand.”
FW: In an era of rapid and fundamental technological change, what skills are infrastructure planners likely to need to keep pace, and design and deliver infrastructure projects that can support a range of possible futures?
Agarwal: It is becoming more and more difficult to plan for infrastructure due to fast-paced technological changes. Increasingly, business models are being disrupted, causing the entire affiliated infrastructure to become unviable. For example, India ceased planning new thermal power plants in 2014 – impacting an established ecosystem which had delivered over 100 GW of new thermal capacity over the previous five years. Planners of infrastructure need to track changes closer than ever before, hence the need for a multi-discipline approach based on technology evolution, climate change, socioeconomic changes and consumer demand.
Whistler: Delivering infrastructure projects is going to get harder in the coming years as it will increasingly need a mixture of hard and soft skills. Technology, of course, has a major role to play. We are already seeing it in developments such as smart electricity grids. Or in the role of social media for stakeholder communications. Or through tools that help develop more innovative and environmentally and socially-resilient infrastructure designs. On the other hand, the soft skills of stakeholder engagement and communication, whether with politicians, local communities and labour, among others, will be increasingly relevant, given how popular sentiment for and against projects can be influenced through social media and other such means.
Assante: Transparency is going to be a major challenge. For obvious technical reasons it is already necessary to know how the infrastructure is built, including knowing what equipment and material was used, yet this is mostly useful from a functional and technical point of view. New layers of data are starting to pile up. Where does the material come from? What is the carbon footprint? What is the water footprint? Is it from fair trade or what can we say about the working conditions of the people in the supply chain? Going forward, companies will have to get better at documenting this information. In the future, data management and data visualisation will play a bigger role, as infrastructure players will likely be required to provide comprehensive corporate social responsibility (CSR) evidence to stakeholders.
Taqi: Digital technologies, such as automated contracts, distributed ledger technologies, such as blockchain, building information modelling (BIM), automation and artificial intelligence (AI), all offer huge potential to the infrastructure sector in terms of greater efficiency, lower operating costs, increased transparency and profit optimisation. Increasingly, we are seeing the convergence of several new technologies. BIM, for example, is a key technology used to improve productivity and integration across various parts of the construction supply chain. Integrating BIM into a blockchain offers greater potential for transparency and the efficient management of data across the infrastructure ecosystem. As these new technologies evolve, infrastructure planners need to ensure that all those involved in the development of infrastructure projects understand the emerging technologies and how to maximise their use. In addition, stakeholders in the infrastructure sector need to be alive to the legal implications associated with incorporating technology solutions into their business models.
FW: What advice would you offer to infrastructure planners on implementing a sustainability programme that delivers durability of future cash flows, cascades social benefits, and ultimately optimises financial and operational stability?
Taqi: The key to de-risking these elements for an infrastructure project is to ensure there is significant investment in the planning and implementation stages. Social acceptance of a project can be obtained through well thought through stakeholder engagement. This is a process of understanding exactly who the stakeholders will be, from the obvious regulators, financiers and immediately impacted community, and extending wider to joint venture (JV) participants, non-governmental organisations (NGOs) and specific subsets of the impacted community, such as environmental groups and indigenous communities, all of whom may have a different view of the impact of a project. Once there is good knowledge of the identity of all stakeholders, there can then be better planning and implementation of stakeholder engagement, the aim of which is to listen, assess and respond. Through this, concerns about impacts can be mitigated, but more importantly, good communication about the project and how it continues to engage with stakeholders will occur.
Assante: Infrastructure planners should involve stakeholders in the implementation of the sustainability programme. This would limit the usual money lending and risk management that come at the cost of the most vulnerable stakeholders. Part of the project can then be considered to be participative, with some of the functions and solutions crowdsourced. This can be done easily during the design and operational phase. Part of the budget for project management must go to side projects that will drastically increase the value for end users, for instance, while granting access to a small area for community projects.
Whistler: The million dollar question is: can we have all of these things at once? In the long term, there does not need to be a trade-off, but there needs to be a more transparent debate in society about what we expect from infrastructure and how much that costs. There is still too much short-term thinking which encourages cost savings at the expense of much greater costs or operational problems or poor sustainability performance later on. One piece of advice would be to broaden that debate, and think about what sustainable infrastructure really means and how it can be achieved.
Agarwal: Infrastructure investments are intensive, long gestation and high impact. However, the pace of technology disruption is expected to increase the risk for infrastructure investments. Telecommunications prove this as the tenure of every new generation of technology is shrinking considerably. Similarly, the reduced costs of renewable energy will impact existing investments in thermal and hydro power plants. The focus on electric vehicles and evolving shared mobility is going to impact roads, parking and transmission infrastructure. Planners must therefore focus on the resilience and adaptability of infrastructure, backed by detailed design scenarios.
“Looking ahead, we do not need a more sophisticated view of infrastructure sustainability. It boils down to a very simple and powerful value: respect.”
FW: How do you expect attitudes toward a project’s social and environmental impacts to evolve in the coming years? Do you believe a heightened, more sophisticated view of infrastructure sustainability will eventually become the norm?
Assante: One can be very confident that infrastructure sustainability will regulate itself. Unsustainable investment will, by definition, lead to a waste of resources and the dissatisfaction of stakeholders. It has happened previously and will happen again in the future. Looking ahead, we do not need a more sophisticated view of infrastructure sustainability. It boils down to a very simple and powerful value: respect.
Whistler: Climate change is going to focus a lot of thinking and shape attitudes in the years ahead, but, in general, a lot depends on how such impacts and general sustainability concepts are communicated to those most affected by infrastructure projects. There will always be opposition to certain infrastructure projects, no matter how sustainable. Who wants to have an airport, motorway or power station built in their back garden? The important thing is that the sustainability of such projects does not get lost in translation. Sustainability and impact is not something that only appears to get measured on spreadsheets or only forms part of high level political debate, but rather is something tangible for those affected by different projects. Getting ‘buy-in’ from those types of stakeholders will be critical to changing long-term attitudes.
Agarwal: The understanding that ESG norms are key to business sustainability is rising rapidly. Companies now employ detailed strategies for proactive work on these areas. Organisations in India now set up special teams to manage and improve the delivery of ESG norms and are trying to breach the basic standard with enhanced delivery.
Taqi: Attitudes toward greater project sustainability continue to evolve, and this has been a trend in recent years. Project proponents are under considerable pressure to ensure that they have developed a sophisticated response to the environmental and social impacts of a project. This pressure is not just from government regulators, but also comes from many external sources, such as JV partners, financiers, the local and global community, NGOs and other interest groups. Thanks to the rise of social media, there is nowhere to hide when a project does not meet the expectations of these external sources. As a result, significant time must be invested in the project planning stage to ensure all environmental and social impacts are assessed, whether that is a mandatory requirement of project approvals or not.
As an entrepreneur, corporate fundraiser and consultant, Benjamin Assante Di Panzillo has been committed to the implementation of sustainability principles for more than 20 years, in different industries. He has been with Egis in Europe since 2005 where he explored and practiced sustainability management in urban and transportation projects, from planning to operation, and advised institutions in respect of sustainability assessment tools. He can be contacted on +33 626 833 887 or by email: benjamin.assante-di-panzillo@egis.fr.
Rahul Agarwal has a decade of experience in infrastructure financing policy & corporate strategy, and is the principal at Invest India, the official investment promotion agency of India. At Invest India, Mr Rahul heads the teams for infrastructure and a special financial investors initiative which attracts sovereign wealth funds (SWFs), pension funds and private equity investments in India. He was instrumental in India’s first asset recycling project, which saw investments of $1.5bn. He can be contacted on +91 958 232 2075 or by email: rahul.agarwal@investindia.org.in.
Joanne Emerson Taqi is a projects and construction partner at Norton Rose Fulbright and is based in the Middle East. Ms Taqi leads the firm’s infrastructure, mining and commodities team in the Middle East and co-leads its regional projects practice. She is the firm’s regional champion for sustainable cities and has 20 years’ experience advising on infrastructure and public-private partnership (PPP) projects. She can be contacted on +973 16 500 214 or by email: joanne.emersontaqi@nortonrosefulbright.com.
Simon Whistler is senior manager of real assets at Principles for Responsible Investment (PRI). He leads PRI’s infrastructure workstream, supporting infrastructure investors with their understanding and implementation of responsible investment principles within their investment practices. He can be contacted on +44 (0)20 3714 3201 or by email: simon.whistler@unpri.org.
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THE PANELLISTS
Egis
Invest India
Norton Rose Fulbright (Middle East) LLP
Principles for Responsible Investment
Infrastructure & project finance
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