We firmly believe in long-term value creation for our investors through the application of ESG principles in the management of our portfolio companies. As one of Australia's first unlisted infrastructure investment managers, we have significant experience in considering and implementing ESG factors into our investment management practices, particularly as they relate to risk mitigation and value creation. This approach has been adopted globally across our infrastructure business, and is reflected in our ESG policy and guidelines (refer to question 5.2).
Businesses and organisations do not operate in a vacuum, and while ESG considerations apply to all, we think they are particularly relevant to infrastructure businesses due to the:
long-term investment horizon and long-life assets;
need to deliver stable long-term risk-adjusted returns; and
role infrastructure companies have in providing essential services.
In addition, infrastructure companies often operate as monopolies or quasi-monopolies and therefore good ESG practice is paramount to the long-term sustainability of the business. Increasingly, regulators recognise this and develop economic incentives for regulated companies that adhere to such principles. ESG is an essential component of what is often described as the 'social licence to operate' i.e. the reputation of the company to its customers, the general public and regulators. For example, one of our airport businesses opened an ‘experience centre’ to engage with the local community on the potential impacts of airport development. The centre allowed community stakeholders the ability to experience potential impacts of things like aircraft noise and construction development.
Our business considers itself a leader in ESG; leading with ESG principles not only delivers investment outcomes for our clients, it can also be a motivating factor for employees across the business and is a key differentiator to attract and retain the most talented staff.
Prior to an investment being made in an infrastructure business, the team considers relevant ESG issues for the business.
In the subsequent due diligence process, an in-depth analysis will be undertaken to understand and quantify (where possible) the relevant key ESG risks and opportunities and to identify any potential gaps in the company's existing ESG policies.
Ongoing asset management
Once an infrastructure business is acquired, the team undertakes ongoing active asset management to enhance performance and effectively manage risk. Specialist fund managers and asset managers in the Unlisted Infrastructure team meet regularly with infrastructure business management teams to discuss various matters, including ESG issues. They also visit business sites in their capacity as shareholder, board member and/or board committee member.
To add value, we actively seek to build relationships at various management levels within the business during the life cycle of the investment. Such relationships provide the opportunity for the open exchange of information and constructive debate of risks and opportunities including ESG issues that materially impact on the value of the investment.
In addition, we seek to ensure that management provides an appropriate level of information to the board to ensure the approach management takes in managing potential risks and realising opportunities is understood by the board. In fact the reporting of ESG issues at board level forms a core part of board reporting.
Examples of the types of reporting requested include:
- Environmental and social risks impacting materially on earnings, including contingent liabilities.
- Governance policies and procedures for assuring compliance with internal ESG policies, improving performance and mitigating risks across operations, the supply chain and products and services.
- Human capital processes including: retention programs; workplace health and safety performance; staff turnover; succession planning, and; training and development programs.
- Performance reporting on measurable environmental factors, for example: energy use; water use, and; greenhouse gas emissions.
In addition, executive and company scorecards are developed to ensure the alignment of compensation of management with the achievement of ESG targets.
Appropriate management of ESG considerations is undertaken as part of the ongoing valuation of infrastructure businesses. The methodologies used for the valuation of our infrastructure assets typically include forecast periods in excess of 20 years. This long-term forecasting period means that long-term ESG issues are inevitably captured in the current valuation of each infrastructure asset. ESG issues are also captured in the valuation of our investments by the independent expert valuer. Notably, when we select valuation experts to appoint to our independent valuation panel, their ability to include ESG factors as part of their valuation is a key consideration in making the appointment. The management and impact of these issues are also considerations in decisions on whether to divest an investment.