We invest directly in infrastructure businesses with long-life assets over a long-term investment horizon. In some instances this is 20 years or more. Our portfolio companies offer essential or strategic infrastructure services to the communities they serve.
Our approach to investment is governed by four key factors:
These infrastructure businesses require ongoing proactive management. Our investment strategy is to typically manage a large enough interest, in many cases 100% ownership, to enable value-added contribution through engagement with management on a variety of levels, from project teams to working groups, through to sub-committees and board.
Through direct and meaningful board representation and participation, the team provides strategic input on ESG issues, business strategy, operational and capital expenditure, capital structure and all other key drivers of value.
"Our investment strategy is to typically manage a large enough interest, in many cases 100% ownership, to enable value-added contribution through engagement with management on a variety of levels from project teams to working groups through to sub-committees and board."
The Unlisted Infrastructure team consists of over 35 investment professionals with significant operational management, investment skills and experience within infrastructure businesses. Led by Perry Clausen, who has more than 20 years' of infrastructure investment experience, the team has people located in countries in close proximity to the assets, which span Europe and Australia.
The RI representatives for the team are Volker Häussermann and Rowan Element. Volker has a strong operational background gained in German utilities and Spanish renewable and gas businesses. He has over 15 years' experience and a strong interest in the management of ESG issues. Rowan has over 13 years' experience in infrastructure finance and has worked closely on many of the team's projects in energy, social infrastructure and transport.
We believe that proactive ESG management improves long-term investment returns and that adopting a responsible investment policy throughout our business is the only viable approach to the creation of sustainable long-term value. An ESG focus also ensures alignment with our clients' long-term interests, as well as the customers that rely upon the services being provided.
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:
In addition, infrastructure businesses often operate as monopolies or quasi-monopolies and therefore good ESG practice is paramount to the long-term sustainability of the business.
Prior to an investment being made in an infrastructure business, the team looks to evaluate all relevant ESG issues. No checklist can appropriately cover all the possible issues, so evaluations are made on a case by case basis. Risk assessment tools as well as country-leading expert advisors are used to help in this analysis. These tools also provide opportunities for benchmarking against similar assets and enable us to identify the early priorities post-acquisition, ensuring that no time is lost when we acquire a new infrastructure business.
Ongoing asset management
Once an infrastructure business is acquired, the team undertakes ongoing active asset management to enhance performance and effectively manage risk. Our specialist fund managers and asset managers meet regularly with infrastructure business management teams to discuss various matters, including ESG issues.
To add value, we actively seek to build relationships at various management levels within the business during the lifecycle 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.
Direct engagement through board-level representation
We have the distinct advantage of being able to engage directly with our portfolio companies via board representation and/or workshops with management. This direct involvement provides the opportunity to drive cultural change, to set ESG KPIs, and allows a two-way conversation between management and investors to ensure alignment on long-term value creation and protection.
We regularly convene workshops and committees to undertake deep-dive analysis and debate opportunities and new initiatives. We also visit business sites in our capacity as shareholder, board member and/or board committee member. Recent initiatives have included, for example: fossil fuel replacement in our ferries business; community experience centres in our airports business; and the promotion of integrated annual reporting beyond purely financial metrics at one of our water utilities.
High quality corporate governance and board reporting
We proactively seek to ensure that management provides information that enables the board to fully understand the approach being taken in managing potential risks and realising opportunities. Examples of the types of reporting requested include:
Where we manage less than 100% of an infrastructure business, we engage directly with our co-investment partners to ensure they understand and support the logic for our focus on ESG issues and to also learn from their approach to this important area. We have found that our co-investment partners are very open to sharing best practice and that significant value can be generated for all parties.
International standards for ESG management
In response to growing community pressure and concern over ESG issues, we have seen a significant focus on ESG reporting by many regulators that oversee our portfolio companies' operations. We target international accreditations and standards for all of our infrastructure businesses. Examples can include ISO certification for health and safety and environmental management.
"Adopting a responsible investment policy throughout our business is the only viable approach to the creation of sustainable long-term value. An ESG focus also ensures alignment with our clients' long-term interests, as well as the customers that rely upon the services being provided."
"We have the distinct advantage of being able to engage directly with our portfolio companies via board representation and/or workshops with management."
"Recent initiatives have included: fossil fuel replacement in our ferries business; community experience centres in our airports business; and the promotion of integrated annual reporting beyond purely financial metrics at one of our water utilities.
"We have found that our co-investment partners are very open to sharing best practice and that significant value can be generated for all parties."
"We target international accreditations and standards for all of our infrastructure businesses. Examples can include ISO certification for health and safety and environmental management."
Local currency returns
|Portfolios outperforming their relative benchmark over five years (% FUM weighted)*||100%|
|We have been investing on behalf of institutional clients for over 22 years. Since inception the core assets have generated a gross internal rate of return of % **||14.0%|
*Note that the Global Diversified Infrastructure Fund was restructured with an inception date of 6 May 2015 and as such five-year data is not yet available; its successor fund (the original vehicle for the foundation assets) had five-year performance above benchmark as at 31 December 2015
**For the period from September 1994 to December 2016.
Source: First State Investments
Please follow this link for information on how our RI and Stewardship Measures are calculated.
The following tables incorporate third party information to provide additional context. We believe that providing an independent view of some typical ESG issues facing the industries and countries where we invest helps to emphasize the importance of considering ESG factors, as well as the value that this approach can add to investment outcomes. These risks are not company specific, but are relevant to the team's larger industry and country exposures.
This contextual information should be considered alongside the description of the team's approach to integrating and engaging on ESG issues, and the company-specific case studies provided. Taken together a more complete view can be formed on how the team is able to generate value through responsible investment and stewardship.
Typical ESG Risks by Sector
The bar chart below counts the number of times different risks have been flagged by Sustainalytics as being material for the different sectors the team invests in. The line graph does the same, only as a weighted average based on the value of the team's holdings in each sector across all portfolios. These risks are generic for the industry and may be different for individual companies. They also don't reflect how individual companies are managing the risks.
ESG Country Profile
The table below provides ESG information for the top 10 countries invested in. For country profiles, we provide a number of indicators for countries where the companies we invest in are domiciled. Like the industry risks, we include a weighted average based on the team’s exposure and also include a global average.
Sector and country exposure percentages are as at 31/12/2016
Source: Sustainalytics (sector risks), United Nations (HDI and carbon), Transparency International (CPI).
The section below provides additional, team specific information on climate change. Further information on our approach to climate change can be found in our climate change statement on the home page.
Team Climate Change Statement
The impacts of climate change are particularly relevant for investing in infrastructure assets due to the long term nature of the business and their function to provide essential services. We are focused on the physical as well as the non-physical impacts of climate change.
Physical impacts of climate change are vitally important to investment in infrastructure assets, as they are often large or wide ranging structures. Such impacts may include weather-related events, such as changes in the frequency of extreme events including floods, storms, and extreme heat. All of those extreme events can impact the physical assets in which we invest. As an example of recognising the risks of climate change to the asset, for a new runway project at one of our airports that is located on a low-lying coastal site, we considered the likelihood and impact of severe events like storm surges, combined with sea level rises in order the determine the parameters of the project (e.g. runway height, seawall construction etc.).
In another case considering an investment opportunity in a sea port, we had to assess the long-term increasing likelihood of cyclonic activity and its potential impact on the port infrastructure. A third example is the long term capital program of one of our electricity network businesses that involves undergrounding of cables to ensure that the community retains its energy connection during extreme storm events in the future. As a practical measure, some of our infrastructure businesses engage climate science experts to conduct a Climate Change Impact Assessment to consider the specific long term impacts of changes in the local climate.
Non-physical impacts of climate change are also important as they may change the way the companies operate. This can include resource availability, supply chain impacts and the various impacts on markets and regulation. For example, the forecasts for the availability of drinking water resources is one of the drivers of the investment program for one of our water utilities.
Another example is one of our water utilities in the UK, where they implemented a program to reduce the carbon impact along its entire supply chain which resulted in significant cost savings. Impacts on markets and regulation will also be profound and whilst some of the physical impacts of climate change may not be felt for many years, the impacts of regulation and markets are being felt already.
France for example, established very ambitious targets to grow the utilisation of biofuels in district heating. A recently acquired company that provides district heating is already a leader in the utilisation of renewable energy utilisation in the sector, as it provides more than 50% of its energy generated from renewable sources. In line with state government policy, the target is to increase this further over the next decade. To achieve this, in the context of the build-out of new district heating solutions, as a standard approach the company always responds to Requests for Proposal with an option that increases the utilisation of renewable energy as compared to the base case. .
"The impacts of climate change are particularly relevant for investing in infrastructure assets due to the long-term nature of the business and their function to provide essential services. We are focused on the physical as well as the non-physical impacts of climate change."
"The forecasts for the availability of drinking water resources is one of the drivers of the investment program for one of our water utilities. The company has also implemented a program to reduce the carbon impact along its entire supply chain, resulting in significant cost savings."