Building a roadmap for sustainable infrastructure: Low-carbon future or pipe dream?

Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position.

Infrastructure is the bedrock of society and crucial to the functioning of everyday life. There is a drive from investors to label their infrastructure as “sustainable,” however, the meaning of this is disputed. There are many aspects to consider when envisioning what a sustainable infrastructure project looks like. Some widely used definitions of sustainable infrastructure include:

1. Inherently sustainable infrastructure – assets that offer environmental and or social benefits due to the nature of the service that they provide, such as renewable energy or social housing provision
2. Climate resilient infrastructure – infrastructure projects that manage physical and transition risks effectively to ensure the asset is preserved into the future
3. Lifecycle sustainable infrastructure – infrastructure projects that are planned, designed, constructed, operated, and decommissioned in a manner that ensures economic and financial, social, environmental (including climate resilience), and institutional sustainability over the entire infrastructure life cycle
4. Benchmarking/certification of sustainability – Infrastructure projects that follow national and international frameworks e.g. B-Corp, reporting to GRESB, BREEAM, SFDR

Defining sustainable infrastructure is a complex task due to the multitude of ESG issues to consider for an asset to be considered truly sustainable and also the interconnectivity of an asset and its stakeholders, suppliers, and the wider infrastructure network. Finding one definition of “sustainable infrastructure” is further complicated by the diversity of infrastructure sectors; energy, digital, transportation, and water, each presents unique challenges. The interdependence of these sectors makes it difficult to isolate and address individual components without understanding their broader impacts. For the purpose of this post and the common themes to be discussed, we will use the lifecycle sustainable infrastructure approach (bullet point 3 above) used by the UN Environment Program (UNEP) when referring to sustainable infrastructure throughout this article.

Although sustainable infrastructure offers immense potential to mitigate environmental concerns and promote future-resilient development, it faces several significant hurdles. To fully realize the benefits of sustainable infrastructure, it’s important to acknowledge and address core problems that threaten to impede its widespread adoption.

A core challenge facing sustainable infrastructure is the lack of investment needed to meet internationally set sustainability targets, such as the climate goals (1.5 warming), Sustainable Development Goals (SDGs), and the Pledge to Net Zero. For example, The Organization for Economic Co-operation and Development (OECD) predicts that around USD 6.9 trillion of annual investment across all infrastructure sectors is needed to meet global 2030 SDGs.

Sustainable projects often call for substantial upfront investments and long-hold periods, such as the HS2 project in the UK, which can deter private sector involvement. Added to this, without historic data to back up their long-term financial returns, sustainable infrastructure projects may be less favorable. This makes it even harder to attract investors away from “traditional” infrastructure investments, hindering progress toward achieving global sustainability targets, and making it harder to tackle pressing environmental, social, and economic challenges.

The rise of “sustainable finance,” including green bonds, public-private partnerships, and dedicated sustainable infrastructure funds, could begin to address this issue and encourage private investment. After a dip in sustainable bond issuance in 2022, it is predicted by S&P Global that global green, social, sustainable and sustainability-linked bond (GSSSB) issuance will return to growth in 2023, reaching USD 900 billion–USD 1 trillion, nearing the record USD 1.06 trillion in 2021. If investors are to continue to invest in these financial products there must be a clear case for asset managers that they can explain to their investors, including demonstrable ESG improvements, communicated through reporting alongside financial returns.

Inconsistencies in regulatory frameworks and government policy can hinder the development of sustainable infrastructure. Ambiguous regulations, opaque sustainability standards, and poorly defined governance structures pose obstacles to implementing sustainable infrastructure projects. The Sustainable Finance Disclosure Regulation (SFDR) framework itself has come under recent scrutiny due to a lack of standardized definitions, vague requirements, and limited enforcement from regulators that give way to inconsistency in the market and claims of greenwashing, of which it aims to eliminate.

This has been met by the recent announcement from the Common Supervisory Action (CSA), launched by the European Securities and Markets Authority (ESMA), that a review of SFDR compliance will be completed over the course of 2023, aiming to encourage standardization and transparency on best practice. As of December 2022, funds falling under Article 8 (promotion of environmental and social characteristics) and Article 9 (make a commitment to a percentage of investments within the fund being defined as sustainable) collectively reached EUR 4.6 trillion AUM, showing seven percent growth from EUR 4.3 trillion AUM recorded in September 2022. Whilst the effectiveness of the current framework’s approach is up for debate, the intent of the regulation, to encourage transparent disclosure and impose more stringent requirements on financial products and their use of wording around sustainable, is a positive step.

Governments can capitalize on the potential returns of sustainable infrastructure by adopting a diligent and continuous review process. For example, the UK Government’s ambition to become the world’s first Net Zero-aligned Financial Centre. Considering the global increase in environmental, social, and governance (ESG) AUM from USD 2.2 trillion in 2015 to USD 18.4 trillion in 2021, with projections to reach a substantial USD 34 trillion in 2026, ambitious goals like these can lead to fruitful outcomes.

To fully leverage this opportunity and stay in sync with the ever-evolving landscape, a well-defined sustainable infrastructure strategy such as the UK’s Net Zero Strategy: Build Back Greener and alignment with international reporting standards become imperative. Such a proactive approach ensures governments remain at the forefront of sustainable infrastructure development and unlock the vast potential of their endeavors.

A lack of integrated planning and coordination between investors and regulators can impede the successful implementation of sustainable infrastructure initiatives. For example, the EU’S commitment to phasing out fossil fuels and transitioning to renewable energy. However, investors in the fossil fuel industry may resist divesting from their assets, through fears of financial losses and asset stranding. In contrast, regulators may face challenges in ensuring a smooth transition for impacted communities and workers. It is clear that the closure of coal-fired power plants is essential for achieving the EU’s climate goals, however, opposition from investors, local communities, and politicians concerned about job losses and economic repercussions can create misalignments between sustainability objectives and investor interests.

Addressing these misalignments requires collaboration between investors, regulators, and other stakeholders. Establishing clear and consistent regulations, promoting transparency in decision-making, and providing support for a just transition to sustainable infrastructure initiatives can help overcome barriers and facilitate investments that contribute to a more sustainable future. Adopting integrated planning frameworks, like the Sustainable Infrastructure Partnership (SIP), further reinforces the effectiveness of sustainable infrastructure projects. Through collaborative efforts and strategic planning, sustainable infrastructure initiatives can be developed and implemented in a manner that aligns with ESG principles, ensuring their long-term success and positive impact on society and the environment.

ESG data capture technology and its availability present both significant opportunities and challenges to achieving sustainable infrastructure solutions. Accurate data enables evaluations of a project’s potential impacts, the efforts required to make it a truly sustainable project, regulatory compliance and overall viability. International and national targets like reaching net zero by 2050, relies on the capture, process and application of reliable and accurate ESG Data such as:

• Building energy performance data
• Industrial process emissions data
• Energy consumption and process data
• Greenhouse gas data (Scope 1,2, & 3 data)

Manual data collection, beyond regulatory requirements, carries a considerable risk of inaccuracies during reporting and places a heavy burden on internal ESG resources. To enhance efficiency, automated data collection through smart meters and advanced data analysis via cloud computing and AI offer faster progress tracking and identification of resource usage and efficiency within assets.

However, it’s essential to recognize that implementing such technologies also incurs financial costs. Striking a balance between data-driven progress and cost-effectiveness is crucial for the widespread roll of out of infrastructure able to demonstrate that is it sustainable in the long term. A key aspect of overcoming these barriers lies in prioritizing innovation and R&D to generate easy-to-collect and reliable ESG data. This approach creates a solid foundation to address challenges and make informed decisions for a sustainable built environment.

Sustainable infrastructure offers vast potential, but addressing its challenges is essential to realize its full value. Confronting investment uncertainty, bridging policy and regulatory gaps, fostering data capture technological innovation, and improving sector coordination are constructive first steps toward advancing its development.

Governments and international agencies, alongside the private sector, hold a critical role in overcoming these obstacles. Through collaborative efforts and well-defined policies, carefully reviewed and proactive, sustainable infrastructure can play a transformative role in turning a pipe dream into a promising low-carbon reality.

This article was written by Louis Edwards, Global Sustainability Consultant at EVORA

1. UN Environment Programme: Sustainable Infrastructure Investment.
2. Organisation for Economic Co-operation and Development: Financing Climate Futures: Rethinking Infrastructure Policy Highlights
3. NCE: “The Sustainable Infrastructure Imperative”. Report of the New Climate Economy
4. Bioy, et al. (2023): SFDR Article 8 and Article 9 Funds: Q4 2022 in Review
5. S&P Global Ratings: Sustainable bond issuance will return to growth in 2023
6. Shaw, M. (2023): SFDR disclosure compliance risks ‘greenwashing’ by EU financial firms
7. PWC: Asset and wealth management revolution 2022: Exponential expectations for ESG
8. Department for Energy Security and Net Zero: Net Zero Strategy: Build Back Greener
9. Euronews Green: EU agrees to push for worldwide phaseout of fossil fuels at COP28