The nature of sustainable infrastructure
investment is one of many areas that
was changed in 2020 by Covid-19.
The economic impact of the pandemic,
as governments around the world
restricted movement and business
activity in an attempt to slow the
spread of the coronavirus, prompted
unprecedented levels of state
spending in areas of infrastructure
ranging from healthcare and education
to employment programmes.
The headline figures in response are
impressive. Capital markets have seen
a record level of issuance of social
bonds to raise funds for such projects.
Morningstar estimates that European
sustainable funds have reached more
than $1 trillion of assets for the first
time on record – with the third quarter
alone seeing more than €50 billion,
representing 40% of the total European
fund flows. The trend is also highly
noticeable in private markets (Figure 1).
Heading into the pandemic, sustainable
investment was typically more likely to
focus on the environment and climate
change mitigation strategies – indeed,
when companies and other organisations
talked about their ESG (environment,
social and governance) performance, the
emphasis in recent years has been very
much on the first of those three factors.
But investing to produce more beneficial
or equitable social outcomes is now
firmly in the spotlight, consolidating the
concept of social license to operate which
has been gathering momentum over the
past few years. This is unlikely to fade
once again into the background as the
world emerges from the pandemic. There
is growing realisation by investors that
infrastructure investments have long-term
consequences on communities, and
ultimately integrating ESG is not just a
risk mitigation tool but a return generator and an opportunity to create further
value by shaping positive outcomes.
Historically, investments deemed and
themed as social were often associated
with an emerging markets geographic
focus, and coupled with a specific impact
thematic – for example healthcare,
water, poverty alleviation and education.
Figure 1: Aggregate capital raised by ESG-committed vs. non-ESG-committed
general partners
Source: Prequin Pro, October 2020.
The United Nations’ Sustainable
Development Goals (SGDs), which were
published in 2015, have a very significant
social element. Relevant to infrastructure
investments are health and safety, supply
chain issues, anti-corruption, diversity,
labour conditions and human rights;
meanwhile, job creation and social and
technological improvements can address
issues such as inequality – both between
the rich and poor, and between men and
women. The increasing importance of
the social element of ESG criteria has
created a heightened focus on social
benefits among organisations and
individuals looking to invest responsibly.
Climate change investment and Covid-19
The idea that investing in infrastructure
can benefit the environment and/or
mitigate the impact of climate change
is not new and is certainly here to stay.
What is different is that the pandemic has
changed some of the dynamics in this
area, in both positive and negative ways.
Reduced travel, industrial activity and
electricity generation during Covid-19
saw global emissions fall by up to 7% in
2020, according to the UN Environment
Programme.1 The impact of the coronavirus
on emissions is, of course, likely to
extend well into 2021. Further lockdowns
have already been imposed across the
world, and it may take several years for
demand in sectors such as air travel
to return to pre-pandemic levels.
Despite this, atmospheric CO2 is
continuing to rise rapidly. This shows
that while the dramatic measures
imposed during the pandemic are helpful
in terms of reducing global emissions,
they remain far from what scientists
estimate is needed to avoid the worst
impacts of the climate emergency.
Meanwhile, the downturn in business
activity in 2020 also led to a sharp fall
in fossil fuel prices, and as economies
return to growth in the months and
years ahead there is a chance that
expansion in some parts of the world
could be underpinned by cheaper oil
and gas, with a concomitant increase
in emissions. Furthermore, while the
share of renewable energy production
has been increasing exponentially, it
has only translated into 18% of the EU’s
gross final consumption in 2018, with
results in transport and heating/cooling
particularly below expectations, as well
as the incidence of “dirty” electricity
also finding its way into Europe.2
This highlights that a lot more needs to
be done to prevent the post-pandemic
economic recovery leading to a rebound
in emissions. At the same time,
Europe is facing an estimated 7%-10%
downturn – the health and social impacts
will be felt across the economy. 3
The post-pandemic period is likely
to provide opportunities to increase
investment linked to climate-change
mitigation: the European Union, for
example, has indicated it will put the
environment at the centre of its Covid-19
economic recovery plans,4 while the
UK has also recently announced more
ambitious proposals to meet its
emissions targets.5 There seems to be
more consistency of policy than ever
before promoting a cost-effective, secure
and “just” transition underpinned by
industrial transformation, technology
and innovation. The green stimulus
does not only achieve a reduction in
emissions but also fosters investment
which can boost job creation in critical
manufacturing, construction and small
and medium-sized businesses, as
well as save consumers money.
In the US, president-elect Joe Biden
has said the US will rejoin the Paris
Agreement at the first opportunity,6 and
several US states already have goals
in place to hit at least 50% renewable
energy by the end of the decade.7
INCREASING THE SHARE
OF RENEWABLE ENERGY
IN THE MIX IS ABSOLUTELY
CRITICAL, BUT IT IS
NOT ENOUGH
How will energy transition achieve
decarbonisation?
- Switch from emitting fossil fuels to low/
neutral carbon renewable electricity - Reduce energy demand by improving
energy efficiency, eg electric vehicles
consume only around 25% of the energy
consumed by conventional vehicles;
heat pumps have a higher performance
coefficient than typical gas boilers - Electric production of alternative fuels
such as hydrogen and P2X for industries
in heavy need of decarbonisation, where
direct electrification is not a solution,
such as shipping and certain industrial
processes
There are no signs that the tough
climate targets put in place by
governments around the world prior to
the Covid-19 crisis will be watered down
in any way, which bodes well for the
future of sustainable investment.
A salient example of this is the pervasive
endorsement of green hydrogen by
governments. Hydrogen is positioned
as the clean technology solution to
decarbonise many areas of the economy,
such as transportation, which has until
now proved challenging with electrification
alone. Europe’s €180 billion investment
to scale up and deploy clean hydrogen8
has completely changed the outlook for
a sharp reduction in costs which should
promote the scaling up of production
and use of renewable hydrogen.
This will provide additional opportunity in
creating a smarter, reinforced distribution
grid and new balancing solutions that
will enable the integration of more
decentralised renewable resources,
including smart metering and storage.
The European Commission estimates
that €350 billion in additional annual
investment will need to be made between
2021 and 2030, compared with the
previous decade. Most of the extra money
is to finance interconnections to link up
countries’ grids and new capacity, including
replacing old power and industrial plants.9
Suffice to say, all of this technology demands security, reliability and resilience. It must also service everyone. Modern businesses, digital customers, people working from home – geography is no longer a hinderance to what you do or where you do it, but connectivity can be. People in rural areas who are now required to work from home need fast and reliable fibre broadband just as much as those in cities and towns. If anything, Covid-19 makes even more compelling the case for high-security, high-capacity, highly resilient and broadreaching digital infrastructure – and to maintain smooth operations, the need for investment is more important than ever.
Figure 2: social, green and sustainability bond issuance, 2018-2020 ($bn)
Source: Bloomberg/World Bank
A boom in social bond issuance
As a barometer for identifying trends
within environmental and social investing
then look no further than the public bond
markets and the issuance of specific use
of proceeds bonds, especially green,
social and sustainability (Figure 2).
Issuance in 2020 was underpinned
by a sharp increase in the issuance of
social bonds (more than 700% year-onyear)
10 – with debt financing channelled
to specific projects which have an agreed
socially beneficial outcomes. This could
be the creation of jobs, the setting up of
healthcare programmes or facilities, or the
provision of education or training services.
The pandemic has had a devastating
impact in all of these areas: the reduction
of business activity, whether enforced or
not, has led to a rise in unemployment
all over the world, with sectors such as
tourism and hospitality particularly hard hit;
the coronavirus has, of course, put national
health systems under unprecedented
pressure; while the temporary closure
of education facilities in many countries,
both at school and university levels,
has created new challenges in terms of
remote learning and digital connectivity.
By the end of November a total of
$155 billion were issued,11 an increase of
869% on the same period in the previous
year. Around $100 billion was raised
by issuing dedicated Covid-19 bonds
covering either social and/or sustainability
projects.12 This has clearly been a record
year for social issuance but that has not
been at the expense of green. This whole
segment of issuance – ie green, social and
sustainability – was on the cusp of issuing
$0.5 trillion in debt this year, another
record. As such the rise in social has not
been a zero-sum game, and with issuers
still raising finance for environmental and
social projects, an increased examination
of social factors is not expected to
be a transitory trend, rather the new
normal for sustainability investing.
Viewing sustainability investment through a new lens
The wide range of social bonds issued
this year, and the likelihood of this trend
continuing for the foreseeable future,
means investors and institutions now have
a much wider choice of socially beneficial
investments – alongside those with
green and/or sustainability credentials.
The pursuit of both social and
environmental outcomes has been a
central tenet of the Columbia Threadneedle
European Sustainable Infrastructure
strategy’s approach to sustainable
investment, which earlier this year invested
in Lefdal, a data centre based in Norway.
Lefdal has excellent environmental
credentials, in particular its industryleading
levels of energy efficiency, which
are based in part on its use of seawater
from a nearby fjord for cooling.13
But Lefdal also has a significant social
impact: the role it plays in supporting
Norway’s digital infrastructure is vital in
terms of providing connectivity to previously
underserved communities – for example
those in remote and rural areas. This can
improve access to digital training and help
create new employment opportunities.
Improved connectivity also has a role to
play in enabling businesses such as those
in the agriculture sector to invest in or
take advantage of new technology, which
can have a positive knock-on effect in
terms of food security and sustainability.
The European Sustainable Infrastructure
strategy has also recently acquired Condor
Ferries, a transport firm that is the primary
facilitator of freight and passengers
between the Channel Islands, the UK
and France. While the shipping industry
as a whole often attracts questions in
terms of its suitability within sustainable
investment portfolios due to carbon
emissions, businesses such as Condor
can play a vital social role in providing
freight and physical connectivity services
for remote or island communities. In turn,
these services can support the likes of
healthcare, food security and employment
opportunities. Certainly as vaccines
supporting Covid-19 are distributed across
the world, freight services will be a critical
enabler of the delivery mechanism.
But this does not mean that the
environmental impact of such operations
can be, or is being, ignored. In the case
of its Condor acquisition, the strategy
is working to improve the environment
profile of the business’s fleet as well as its
onshore activities. This will involve reducing
waste and improving efficiency across the
organisation, while also making a transition
to cleaner propulsion technologies over the
course of the decade. Socially responsible
investors are also increasingly aware of
their ability to shape the direction taken
by investee organisations to expedite the
transition to low-emission technologies.
Social infrastructure investment after the pandemic
Clearly, Covid-19 has created a widespread
need for socially beneficial investment,
but this need is unlikely to disappear
as we emerge from the pandemic.
Firstly, the socioeconomic impact of the
coronavirus is likely to be long-lasting:
it already appears to have exacerbated
income inequalities in many communities,
with employment among better paid
white-collar workers less likely to have
been affected than those in customerfacing
roles, for example, or jobs that
cannot easily be carried out remotely.
It also remains to be seen what the
long-term health impacts of Covid-19 will
be and what steps might be necessary
to mitigate them; and in the meantime,
governments around the world are likely
to need to make significant infrastructure
investments in order to support
national vaccination programmes.
But the recent rise in the importance of
social investing may have helped create
a better understanding among investors
of the interplay between environmental
and social concerns: take investment
in green infrastructure as one example.
The likes of the EU see a new green deal
as the ideal route out of the pandemicinduced
recession because of its ability
to create thousands of new employment
opportunities, not just because it will help
the bloc reach its emissions deadlines.
Indeed, recent research suggests that
investment in green projects has the
potential to create up to three times as
many jobs as investment in competing
fossil fuel-based projects (Figure 3).
A reduction in reliance on oil and gas
can have additional social benefits:
improvements in air quality as a result
of the switch to electric motor vehicles,
for example, are expected to deliver
major health benefits, and these will
be felt disproportionately by those
living in more crowded urban areas.
Ultimately, though, progress in minimising
the impact of climate change will
inevitably have huge social implications
in terms of reducing the prevalence
of extreme weather events, thereby
limiting the extent to which they can
ruin harvests, damage property and
displace people in the decades ahead.
Figure 3: Jobs per million investing in green projects vs. fossil fuels
Source: Will Covid-19 fiscal recovery packages accelerate or retard progress on climate change? May 2020 Cameron Hepburn,
Brian O’Callaghan, Nicholas Stern, Joseph.