ESG Topics

Key environmental, social and governance topics

Infrastructure Investment

Although infrastructure is not a separate asset class under the South African Investment Policy Guidelines, infrastructure investment by pension funds has been an area of increasing focus from both from investors in search of suitable investments and sources of diversification and yield, as well as from governments with the interest to tap into the growing asset base of pension funds as a source of affordable debt to complement limited budgetary resources.

For context, it is important to understand what is meant when talking about “infrastructure investment” as well as the different ways for institutional investors to invest.  Below is an overview of the main categorizations of infrastructure by (economic and social) sectors, and by project stage (e.g., greenfield, brownfield and secondary market). Economic infrastructure is more likely to generate commercial returns on investment and attract private finance, whereas the obligation for social infrastructure is to meet social needs. With the latter, returns often do not cover costs, and as a result such investments are typically financed by the public sector. However, both economic infrastructure and social infrastructure are essential foundations for long-term sustainable development.

Economic infrastructure, which usually meets these criteria, can in practical terms be considered by investors to be an asset class, while social infrastructure is less likely to be considered an asset class. 

Source: Adopted from World Bank/PPIAF (2014) Institutional Investment in Infrastructure in Emerging Markets and Developing Economies

Investment in infrastructure as an asset class is typically made through an equity or debt investment. Within these two approaches, there are a number of direct and indirect channels through which an investment can be made, as shown in figure below.

Direct investing (project equity and debt) typically represents a very small portion globally (around 1.5%) of pension fund portfolios. However, infrastructure investment in a wider definition, including listed equities and corporate bonds oftentimes constitute a more substantial portions of the overall assets of pension funds globally (around 15% of pension funds’ portfolios). 

Investment decisions should only be made on a rigorously assessed, risk-return basis, and good governance is key.  ESG risk assessment is critical for infrastructure investments given their expected long economic life-time of 30, 50 or even 100 years. In view of this, some infrastructure assets fundamentally also present more favourable long-term opportunities compared to other assets, based on changes in policy, technology and public perception. 

Due to limited experience by institutional investors in managing infrastructure assets and in managing risks associated with infrastructure projects (construction, market, operational, regulatory and political risks etc), infrastructure investment is predominantly done “indirectly” i.e. via a specialised PE infrastructure fund or other investment vehicles where well-designed risk mitigation structures are key to achieve the dual goal of risk-adjusted returns and long-term economic development. 

Figure: Infrastructure financing and investment options 

Source: Adopted from World Bank/PPIAF (2014) Institutional Investment in Infrastructure in Emerging Markets and Developing Economies

Further reading        

PRI investor tools, infrastructure: https://www.unpri.org/investor-tools/infrastructure

IFC Performance Standards 

CDC Toolkit (https://toolkit.cdcgroup.com/sector-profiles/infastructure/)

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