What is Sustainable Infrastructure? A Guide to Investors

Key takeaways

To qualify as sustainable infrastructure, a company's products/services must help the environment or society, and it must operate in a way that reduces risks and doesn't harm the environment or society.

To distinguish "sustainable" infrastructure exposure, we must assess how each traditional infrastructure sectors contribute to sustainable development in different regions, and assign a level of impact contribution to each sector based on geography.

The investment theme of "Sustainable Infrastructure" balances economic, social, and environmental aspects. Projects are classified into 4 categories and 12 sectors based on their functionalities and benefits to society.

As a foundational part of a prosperous community, infrastructure has a positive impact on the lives of the people it serves.

Providing electricity and water, reliable transportation and access to health and education serves to improve quality of life and leads to higher productivity, resulting in economic growth that is inclusive. These social outcomes are positive, but sometimes result as an indirect consequence of infrastructure development rather than being the primary focus of the given project. In our view, the most impactful infrastructure is that which serves objectives that go beyond the provision of basic services and contributes both to long-term economic growth whilst advancing environmental and social objectives.

To qualify as sustainable infrastructure, two elements must be satisfied.

Firstly, a company’s products and/or services must make a meaningful contribution to environmental and/or social objectives. Secondly, the company must conduct its business operations in a manner that mitigates relevant environmental, social and governance risks and, accordingly, does no harm to broader environmental or social objectives.

It should be noted that the relative contribution of each company within infrastructure to environmental and/or social objectives will vary. A major element in assessing contribution is the geography of the infrastructure, specifically whether it is based in frontier, emerging or developing countries. Clearly, the installation of a brand new, economically empowering piece of infrastructure in a frontier market is more socially impactful, relatively speaking, than the upgrade of an existing piece of infrastructure in the developed world.

We define environmental objectives in accordance with the six environmental objectives of the EU Taxonomy for Sustainable Activities:

1. Climate change mitigation
2. Climate change adaptation
3. The sustainable use and protection of water and marine resources
4. The transition to a circular economy
5. Pollution prevention and control
6. The protection and restoration of biodiversity and ecosystems

We define social objectives in accordance with the most recent (draft) report¹ of the EU Taxonomy for Social Activities, released in February 2022. We caveat however that the final report is currently indefinitely delayed.

1. Decent work (including for value-chain workers)
2. Adequate living standards and wellbeing for end-users
3. Inclusive and sustainable communities and societies.

From the aforementioned social objectives, 2 and 3 are the most relevant to infrastructure projects.

Furthermore, we consider the role of infrastructure in supporting the UN Sustainable Development Goals (SDGs). Of the 17 SDGs, six have relevant links to infrastructure development, namely:

- SDG 3: Good Health and Wellbeing
- SDG 6: Clean Water and Sanitation
- SDG 7: Affordable and Clean Energy
- SDG 9: Industry, Innovation and Infrastructure
- SDG 11: Sustainable Cities and Communities
- SDG 17: Partnerships for the Goals

Distinguishing Sustainable Infrastructure

In order to distinguish a “sustainable” infrastructure exposure from a broader, traditional infrastructure exposure, the traditional sectors of infrastructure must be assessed for their relative contribution to sustainable infrastructure development, i.e. their relative contribution to economic, environmental and social objectives in the regions where infrastructure is located (i.e. developed markets, emerging markets or frontier markets respectively). The result is that each traditional infrastructure sector can be assigned a level of contribution to sustainable infrastructure development, which is minimal, moderate, significant or high, and which varies according to geography. Accordingly, with the exception of fossil fuel infrastructure, all remaining sectors of infrastructure can be expected to contribute, in varying degrees, to sustainable infrastructure development and therefore have a net positive impact on the UN SDGs and the environmental and social objectives of the EU Taxonomy.

We have identified and classified as well as scored and ranked four categories and 12 sectors of infrastructure, which are presented in the following section.

Classification Methodology

The investment theme of “Sustainable Infrastructure” aims to balance the economic, social and environmental aspects of infrastructure development.

To achieve this, infrastructure projects are classified into four categories and 12 corresponding sectors based on the functionalities and benefits they provide to society.

Transportation Infrastructure: Transportation infrastructure is a crucial component of the overall infrastructure ecosystem and plays a vital role in supporting economic growth, improving accessibility and mobility and reducing the environmental impact of transportation. Transportation infrastructure typically accounts for a significant proportion of public infrastructure investment. According to some estimates, transportation infrastructure, including highways, bridges, public transportation systems, ports and airports, can account for up to 50% of total public infrastructure spending.² This high level of investment reflects the importance of transportation infrastructure in improving the quality of life for people.
- Passenger Transportation: Companies promoting the use of public transport which reduces GHG emissions and improves accessibility and mobility for commuters.
- Ports: Companies improving supply chain efficiency, reducing the environmental impact of shipping and embracing eco-friendly practices.
- Airports: Companies facilitating trade and tourism, improving connectivity and attracting investment and trade, especially in emerging / frontier markets.
- Toll Roads: Companies operating a key part of public infrastructure, providing an alternative route for vehicles and reducing traffic congestion.
- Freight Rail Transportation: Companies offering an efficient, eco-friendly mode of transport for goods, through intermodal networks and smart rail systems.

Environmental Infrastructure: Environmental infrastructure is focussed on the green transition and, accordingly, has the objective of providing essential services such as energy and water to society in a manner that leads to improved environmental outcomes for the regions in which it is based. Renewable energy systems, for example, enable a substantial reduction in CO₂ emissions, while water infrastructure is essential for providing water for human consumption, agricultural and industrial use and waste management infrastructure is essential for both achieving greater circularity, and preserving value, within the economy and reducing pollution and water contamination.
- Renewable Energy Utilities and Transmission: Companies facilitating the integration of clean, renewable energy into the grid.
- Water Utilities: Companies providing clean drinking water, efficient wastewater treatment and minimising water contamination and wastage.
- Waste Management: Companies reducing landfill waste, mitigating pollution, conserving resources and lowering GHG emissions.

Data and Telecom Infrastructure: Data and Telecom infrastructure is essential for a sustainable economy because it enables the efficient flow of data and information. Data infrastructure is used to optimise economic processes, analyse economic trends and develop predictive models that can be used to inform economic policies and strategies. It can also be used to monitor and track the performance of businesses and markets and to identify areas of opportunity. Data infrastructure is critical for understanding the effects of economic policies and decisions and for providing the evidence needed to support effective decision-making. By providing a platform for data sharing and collaboration, data infrastructure can enable better communication between stakeholders, allowing for better informed decisions that can lead to more sustainable economic outcomes.
- Data Centers: Companies operating data centers that prioritise energy efficiency, minimise environmental impact and contribute to local communities.
- Telecom Infrastructure: Companies fostering global connectivity and bridging the digital divide to promote inclusivity and economic empowerment.

Social Infrastructure: Social infrastructure is essential for a sustainable and fair economy. It provides the necessary resources and services that enable people and communities to lead healthy, safe and productive lives. Having access to quality social infrastructure helps to promote economic growth and reduce inequality by providing individuals and communities with the resources and services they need to succeed. This means that those with the greatest needs can have access to the resources and services they need to succeed. This helps to promote social mobility and prevents people from falling through the cracks.
- Health Care: Companies providing access to medical services, including preventative care, diagnostics, treatment and mental health support.
- Elderly Homes: Companies operating elderly homes to improve well-being and quality of life through collective care, social interaction and recreational activities.

References

European Commission, “Final Report on Social Taxonomy”, February 2022. Available at: https://commission.europa.eu/system/files/2022-03/280222-sustainable-finance-platform-finance-report-social-taxonomy.pdf

Congressional Budget Office 2019, American Society of Civil Engineers and the National Conference of State Legislatures 2019.

Key takeaways

Distinguishing Sustainable Infrastructure

Classification Methodology

References

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