The Observer

Articles of Interest

Private investments like real estate and private equity provide great opportunities for ESG investments

By Tania Caceres, Principal, Risk Nexus 
Catherine Ann Marshall, CFA, M.A., Principal Consultant, RealAlts


It was a proud moment for AIMCo’s Vice President of Responsible Investment when she heard the news that a rail company in AIMCo’s infrastructure portfolio had just launched the UK’s first zero emissions train. “Rail is fundamental to enable the transition to the low-carbon economy,” said Alison Schneider as she explained that the business case for investing in sustainable infrastructure is only getting stronger.

Ms. Schneider, who heads Responsible Investment for AIMCo, a $119 billion asset manager, said the business case for sustainable infrastructure is based on a triple bottom line: economic growth, quality of life indicators, and climate resilience. 

The economic growth aspect of infrastructure is not a surprise. Most investors value infrastructure’s attractive long-term risk-adjusted returns along with its associated benefits of portfolio diversification and inflation protection. 

In addition, investors who know the UN’s Sustainable Development Goals are aware that resilient infrastructure is among the 17 quality of life indicators.

But infrastructure’s contribution to climate resilience - as illustrated by AIMCo’s investment in UK-based rail leasing company Porterbrook - could be news to some investors who mainly think of equities as the path to lowering portfolio emissions. Porterbrook supports the “E” in AIMCo’s ESG program by decarbonizing its rolling stock.

In fact, Porterbrook fits the criteria as a well-rounded ESG investment. It also supports “E” by re-using and recycling decommissioned rail cars and supports “S” by providing vital public transit to UK towns and villages.

Reporting as a catalyst

The role of asset-class specific ESG reporting as a catalyst to sustainable investing became clearer as Ms. Schneider continued: “Infrastructure-specific sustainability reporting came later than real estate and equities due to the complexity of the asset class” because the challenge was to find commonalities between many types of investments in a typical infrastructure portfolio. “Unlike real estate where a building is easily comparable to another building, the difficulty was to find metrics that were comparable across widely different sub-sectors such as for a bridge, and airport and a port despite all being transportation focused,” she said.

Ms. Schneider is in a unique position to see the importance of ESG reporting in infrastructure as she played a leading role in bringing GRESB (formerly known as the Global Real Estate Reporting Benchmark), a global reporting framework, to the asset class.  The impetus started during a chance discussion with an industry associate, and quickly snowballed. Before long, Ms. Schneider was chairing a committee of large, like-minded global asset owners who all wanted a sustainability reporting format for infrastructure that was material, quantitative, and specific.

GRESB Infrastructure was launched in 2015 and continues to increase its asset and fund participation numbers.  Its scoring system helps third-party investment managers compare their year-over-year performance as well as their rank against global peers which drives a virtuous feedback loop between the results and assets’ ESG implementation, said Ms. Schneider.

Perhaps unsurprisingly, this virtuous feedback loop applies to Porterbrook. The rail company has earned the top score awarded by GRESB – 5 Stars – and ranks second in its infrastructure peer group.  Ms. Schneider says the company now has its sights set on being number one.

Jeff Pentland, Managing Director at Toronto-based Northleaf Capital Partners, agrees that reporting has been a major impetus behind private asset ESG programs.  As a third-party private equity, infrastructure and private credit manager to large institutional asset owners, Northleaf credits Principles for Responsible Investing (PRI) for helping to get private assets into mainstream ESG investing.

“Once large Private Equity investors around the world subscribed to the PRI, Responsible Investing gained much more visibility,” said Mr. Pentland. He explained that because the founding members of PRI were large assets owners with active private market investment programs, their involvement was a catalyst for their investment managers to get on board.
Northleaf’s ESG program has been an evolution. It adopted its Responsible Investment policy in 2011, its membership in PRI in 2016, and its public endorsement of the Task Force on Climate-related Financial Disclosures (TCFD) in 2019. “Becoming a TCFD supporter was the ‘double-click’ on the environment in our view,” Mr. Pentland said.
He described ESG investing as “a perfect fit with private market investing.” In particular, the TCFD process encourages consideration of material climate risks and opportunities and that causes the investment teams to do “exactly the kinds of things that any long-term investor should pay attention to and understand.  I would argue that if a private markets investor is not paying attention to these things they are missing out,” he said.

Control is key

A major attraction of ESG in private assets is simply the fact that investors can initiate and direct sustainability programs when they own the assets. This is a key differentiator between private investments and public equities.  In the latter case, even large investors have no control over a public company’s management and can only make suggestions to executives about sustainability.

However, Mr. Pentland pointed out that this advantage is contingent on the investor being in a control position in the private asset. Some of Northleaf’s private equity investments involve fund investing where there is no direct control.  But Northleaf’s infrastructure funds directly invest in assets and provide many examples of ESG decision-making. These include:

  • Renewable energy (environmental): Northleaf believes that renewable energy is a big investment opportunity. Their expertise in intermittently generated wind and solar energy allowed them to see the opportunity to direct capital to constantly generated geothermal energy as a niche investment strategy.
  • Health and safety (social): Northleaf has consistently looked to ensure workplace health and safety are a priority at their assets and for the boards of directors that oversee them.
  • Cybersecurity (governance): Northleaf has a focus on insuring the privacy of data. In one case, it made changes to safeguard the privacy of users’ consumer information after purchasing a stake in a toll road.

Long-term view

Ms. Schneider agrees that the control aspect of private investing is a key differentiator. She said that by making management decisions with a long-term investment perspective, the business case for sustainability becomes more compelling in private assets than it is in public equity investing. 

“It’s stronger because the expected holding period is longer and the benefits that come from sustainable investment in private assets accrue to the fund for a very long time,” she explained. “It’s much more of an impact than we see in equities.”

Northleaf has also experienced the benefits of thinking long-term. “ESG is also a natural fit for private market investments because in many cases we are investing for the long-term – we are making commitments for 10-12 years or longer - and in relatively illiquid asset classes.”

As an example, Mr. Pentland discussed the long-term risks identified during the potential acquisition of a liquid storage terminal in the European port of Ghent.  Because it was a long-term investment, a key risk that was evaluated was the potential for sea level rise. Once it was determined that risk was covered by the port’s mitigation program, the next risk the investment team looked at was the policy risk of less demand for fossil fuel storage in future. The team determined that the storage was flexible enough to hold biofuels in future and the investment went ahead.

Mr. Pentland summed it up: “In order to be a good fiduciary and to deliver returns we need to think about ESG factors.” 


Tania-Caceres_pic_2.jpg Tania Caceres, Principal, Risk Nexus 

Tania Caceres is professional risk manager and ESG integration strategist based in Toronto. After pursuing studies in business and law, she began her real estate career at Lehndorff in 1994. She later joined Dorchester Oaks and Canadian Real Estate Investment Trust (CREIT) in 1997 where she was part of a small team aiding in the formation of Canada’s first REIT. Tania joined Emerald Realty in 2003 to aid in the launch of what is now Triovest Realty, and held several senior positions there until 2014, including Vice President Risk Management and Integrated Real Estate Services practice leader. Tania launched Risk Nexus, a risk advisory and consulting firm in 2014, her firm advises institutional, private sector investors and asset managers in Canada, USA, and Europe. Widely recognized as an industry innovator and thought leader in matters of sustainability, climate risk, operational resilience, and governance, Tania was honoured by Canada’s Clean 50 for her contributions to clean capitalism, sustainability and ESG factor integration in real estate. Tania is a founding member of UNISDR’s ARISE network in Canada, holds a CRM, certification in risk management from the University of Toronto and recently completed GARP’s Sustainability and Climate Risk (SCR) certification requirements.

Catherine-Marshall_pic.jpg Catherine Ann Marshall, CFA, M.A., Principal Consultant, RealAlts

Catherine Ann Marshall is an Investment Consultant specialized in private assets. Her consulting work includes ESG integration and TCFD strategy in real estate, private debt and agriculture. Since 2008 Catherine has led consulting assignments for a wide variety of large Canadian and global asset owners and investment managers either as an independent consultant or as Associate Partner, Global Real Estate, Aon Investment Consulting.  Prior to her consulting career, Catherine was Director of Research and Strategy, Real Estate at the Canada Pension Plan Investment Board (CPPIB); Senior Vice President and Global Strategist at LaSalle Investment Management; Associate Portfolio Manager at Genus Capital Management; and Assistant Portfolio Manager at the British Columbia Investment Management Corporation (BCI).
Catherine is past Chair, Risk Management and Alternative Investments Committee, CFA Society Toronto; past executive member and Treasurer of the Canada Green Building Council Greater Toronto. She is the ESG columnist on the Expert Panel of the Canadian Investment Review and is a frequent speaker at institutional investment conferences.  She holds the CFA designation, is a certified Sustainability and Climate risk professional (GARP), has an undergraduate degree in Economics and Urban Studies from Queen’s University, and a Master’s in Economics and Finance from Simon Fraser University.