Environmental, social and governance (ESG) considerations are part of calculating long term financial sustainability of infrastructure investments, according to ClearBridge Investments.
ClearBridge, which was known as RARE Infrastructure until earlier this year, takes a three-pillar approach to ESG analysis in infrastructure. The listed equities manager uses ESG to model cash flow impacts of sustainability and perform sensitivity analysis, said Shane Hurst, portfolio manager.
"Clearly, environmental factors have an impact on cashflows," Hurst said. "On the positive side, we look at the growth in renewables. On the negative side, environmental factors also have negative implications, such as looking at oil and gas projections around the world."
ClearBridge noted that as the world transitions from higher-carbon-emitting forms of energy generation to more renewable-based generation in an attempt to control climate change, they still expect natural gas to be used as a bridging fuel. However, markets around the world are starting to price in a much faster transition to renewables as renewable capacity growth grows more strongly than anticipated.
ClearBridge also notes that ESG factors that cannot be captured in cash flows may be captured through an adjustment to a cost of equity, or hurdle rate. Focusing on the cost of equity can allow global comparisons within subsectors and can also capture improvements or degradations in a company's ESG profile going forward.
Strong performance on ESG factors will impact on cost of equity for listed companies in the infrastructure sector such as utilities, Hurst said.
"Over last year to year and a half, the cost of equity has come right down as people has valued the thematic of sustainability much more strongly," Hurst said. "That causes good performance out of the names that we invest in, particularly those in the renewable area or those that are moving forward with decarbonisation over the next 20-30 years."
As part of this analysis, ClearBridge has constructed a scorecard approach to integrate with its research capabilities.
"We have built out our scorecard to look at a number of key factors," Hurst said. "For each of these - the E the S and the G - we look at the rating of the company now, and the rating from five years ago, we then use the third-party providers like Sustainalytics and ISS to do a temp check and as an advisor, to make sure we're not missing anything. We almost get the best of both worlds. We have the ability to really price that adequately and capture that adequately, and use the other folks for advice."
ClearBridge also uses engagement and active management with company management but also with regulators, policymakers and other key stakeholders as well as using active proxy voting.
ClearBridge noted that the advent of hydrogen as a feedstock fuel has also captured ESG attention, with technology being brought to bear to develop green hydrogen - using renewable energy to power the electrolysers that generate hydrogen fuel.
"We currently have grey and blue hydrogen, but over the next 10 years, as the cost comes down of renewable energy, we will see more green hydrogen," Hurst said. "It does impact on the companies we invest in, in that a number of gas and pipeline companies are looking at various carbon capture techniques, and how they can use blue hydrogen to their advantage, but it's in the early stages.
"What you'll see, in terms of the companies we invest in, a blending of natural gas in pipeline with hydrogen - you might get to 20% hydrogen, 80% gas. The big benefit for us, the maintenance work around this tends to be rate- based. It ends up being a positive for us."
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