ESG Infrastructure Debt: The New Norm

The long-term nature of private infrastructure debt makes investments susceptible to ESG risks such as climate change – a rigorous and methodological approach is crucial for investors seeking exposure 

Allocations to private infrastructure debt have grown substantially in recent years. Institutional investors have been attracted by its long duration, illiquidity premium over public markets, and a risk proposition underpinned by comparatively lower credit losses, ultimately translating into lower-risk capital charges for insurance companies that increasingly demonstrate interest in this asset class. While these factors underpin the outlook for private infrastructure debt, investors now increasingly focus on incorporating sustainability into the investment process, scrutinizing projects from both a returns and a sustainability perspective.  

As long-term investors, our infrastructure platform aims to be at the forefront of the growth of sustainable infrastructure debt. Investors are no longer content with managers who simply tick the ESG boxes, as also indicated by the EU Sustainable Finance Disclosure Regulation (SFDR) which provides a clear indication on the irreversibility of this course: sustainability has become the new norm.  

ESG Integration Is an Opportunity
Effectively integrating ESG into the investment process poses several challenges to investors, amid a proliferation of ESG standards and data gaps. This is particularly true for infrastructure – an asset class central to decarbonization, digitalization, and the UN Sustainable Development Goals (SDGs) – but a progressively wider investable universe also translates into higher complexity when it comes to impactful ESG integration. At the same time, the growth of the market and a deeper pipeline of investment opportunities also allow for an integration of return considerations with more definite ESG investment strategies.  

With this in mind, our infrastructure business has developed an ESG methodology for the provision of financing to infrastructure businesses that drive clear environmental and societal improvement, in addition to potentially providing attractive return characteristics. Our methodology is based on a wide range of quantitative and qualitative factors, such as CO2 emissions, water usage, and worker safety, and is supported by a Second Party Opinion that endorses its alignment with the highest standards and frameworks such as the Green and Social Bond Principles.  

Our ESG approach allows for a robust investment selection, strengthens our negotiation power during the originations process – for example by enabling us to negotiate ESG-related covenants – and empowers our risk monitoring. This approach supports the measurement and mitigation of ESG-related risks, such as climate risks, that may threaten the credit profile of long-duration infrastructure debt and seeks to reinforce the value proposition of our investments.

About DWS
The DWS infrastructure business has been investing in infrastructure assets since 1994. The global platform provides client solutions covering infrastructure private equity and debt, through funds and separate account mandates, and gives investors access to economic sectors such as transportation, utilities, telecommunications, and other service sectors contributing to the basic functioning of local and global economies.