4. Seeking Greener Pastures: Exploring the Impact for Investors of ESG Integration in the Infrastructure Asset Class

Information asymmetry occurs when one party in a transaction has more information than the other party. Informational asymmetry leads to modified market behavior on the part of both the advantaged and disadvantaged parties, as the advantaged party will attempt to exploit its informational advantage, and the disadvantaged party will aim to either seek more information, or, if this is impossible, engage in certain forms of risk mitigation to control for having less information than the other party. George Akerlof, in his paper The Market for Lemons, famously discussed the issue of information asymmetry as it pertains to the automobile market. He claimed that defective used cars had the potential to damage the entire used car market, as buyers are unable to distinguish between good and bad used cars, and therefore attempt to control for the risk of defective used cars by spending less on all used cars (Akerlof 1970). This means that used cars in good condition cannot attain the price which they deserve, because of the entire market being harmed by defective cars (Ibid.). As a result, owners of used cars in good conditions are less motivated to sell these cars on the market (Ibid.). This paper will argue that, through analyzing infrastructure investments using an ESG lens, investors will be more able to rationally control for risk in infrastructure. Rather than engaging in generalized risk controls as a result of lack of information, as seen in Akerlof’s example, investors will instead be able to engage in targeted risk control through the analysis of ESG factors.

Envision is a sustainable infrastructure rating system which uses 60 sustainable criteria to measure the performance of infrastructure projects. The criteria are arranged in five categories: quality of life, leadership, resource allocation, natural world and climate, and risk.

Autocase is a software designed to model the cost, benefit, and risk of green infrastructure features and low-impact development systems using the Triple Bottom Line (environmental, social, and governance) Cost Analysis.

The risk of impact infrastructure is divided according to the type of investment. For example, greenfield infrastructure investments are riskier than brownfield investments which are considered the least risky.

The West Coast Infrastructure Exchange is an infrastructure platform which is designed to help connect potential investors with sustainable infrastructure investments. It also aims to develop best practices in the sustainable infrastructure field and improve transparency in the infrastructure asset class by providing more information to investors regarding infrastructure performance.

The Canadian Impact Infrastructure Exchange aims to help connect private investors with public-private partnerships in the field of impact infrastructure. It also aims to provide high-quality information regarding both the financial and extra-financial returns of impact infrastructure projects.

GRESB Infrastructure is a tool which provides systematic assessment, objective scoring, and peer benchmarking for environmental, social, and governance (ESG) performance of infrastructure companies and funds. These evaluations take place around a variety of metrics, including metrics that measure management and leadership, communication, engagement strategies, and financial performance indicators. GRESB Infrastructure seeks to measure both the performance of infrastructure assets individually and at the portfolio level. It is a tool that was developed in close consultation with institutional investors including pension funds.

The LEED is a building evaluation and certification system that measures building performance based on several metrics, including indoor environmental quality, energy and water efficiency, environmental friendliness of materials, location and transport access, as well as innovation and regional environmental impacts, among other factors. Four ratings are assigned to a building based on performance in relation to the metrics. From lowest to highest, these ratings are: Certified, Silver, Gold, and Platinum.