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US (and global) infrastructure at the crossroads: ESG, stop or go?

ESG process and practices into private equity and PE infrastructure funds needs oversight from asset owners and state/local governments

Francis Byrd was talking on a panel at the RI New York conference 2019 on 'Debating ESG integration in private equity: risk mitigation or value creation?'

In the face of the climate crisis, an ever-growing global population and deteriorating infrastructure, what role should ESG play in the building/rebuilding of our world? 

It is estimated that the construction and repair of new and older global infrastructure will require an estimated $15 trillion. In the U.S. alone, it is estimated that the amount needed is at least $4.5 trillion. 

America’s financing challenge is deepened by the public sector’s over-leverage and the federal government policies that demonstrate an inability and/or unwillingness to assist states and localities seeking funding. 

Banking institutions have also moved away from their previous role as long-term capital allocators seeking to avoid these types of investments, partly as a result of risk mitigation and regulatory requirements.

The history of American infrastructure has rarely been sensitive to environmental, social or governance concerns – as the late Robert Moses, considered New York’s master builder deliberately excluded all of those considerations, with the acquiescence of the governmental and financial sectors – and served as the model for infrastructure development throughout the United States and abroad.

It is in this economic climate and with this history that the role of infrastructure financier then has fallen to the private equity/PE infrastructure industry – viewed by some observers as the swashbucklers of the American financial sector – to fill the critical capital financing and ESG gaps.

A recent Congressional hearing, held by the Financial Services Committee of the U.S. House of Representatives, would lead us to believe that private equity firms are ill-equipped to serve as an ESG-balanced vehicle for the financing of America’s serious infrastructure needs. Committee members and witnesses were divided on the value that PE brings. 

So can ESG help turn that perception around and add financial value?

The answer is YES. However, the effort to fully integrate ESG process and practices into private equity and PE infrastructure funds will require not only the voluntary compliance of private equity firms to adopt the PRI’s six principles (see below); but serious encouragement and oversight from asset owners (public/union funds, SRI and others), as well as state/local governments in developing and contractually holding PE firms to higher standards – from conception, scope, planning, stakeholder outreach to construction, public use and maintenance (asset refurbishment and replacement) – and for the PE general and limited partners’ eventual exit.

ESG CONSIDERATIONS IN INFRASTRUCTURE INVESTING

  • maintaining social licence to operate 


  • health and safety standards (pre- and post- 
commercial operation date) 


  • biodiversity impacts 


  • alignment of interest with shareholders 


  • stakeholder management and community relations 


  • labour standards 


  • land rights, indigenous rights 


  • accessibility and social inclusion 


  • service reliability 


  • climate change impact and additionality 


  • resource scarcity and degradation 


  • extreme weather events 


  • supply chain sustainability 


  • accountability 


  • board independence and conflicts of interest 


  • management and board oversight of ESG 


  • bribery and corruption 


  • tax policy 


  • cyber security 


  • diversity and anti-discrimination 


The necessary global infrastructure for our 21st Century society should be much further along – especially here in the U.S. A more seamless integration of ESG factors into private equity investment would go a long way to re-shaping not only public (and investor) opinion, but the physical shape of our world. Now is the time to get started.

Francis H. Byrd is Managing Partner, Alchemy Strategies Partners LLC