Speaker 1Not long ago, investment managers in infrastructure, like in other asset classes, were lining up to stress how ESG was in their DNA. But a backlash against ESG investing has gained momentum, particularly in the United States. The idea that managers should be considering environmental, social, and governance factors in their investment decision-making has become controversial in some quarters. Amid the backlash, some managers have quietly dropped their commitments to ESG or watered down their net-zero objectives. Others have adjusted their language, avoiding politically contentious terminology, while still sticking to the core tenets of their previous ESG strategies. But there are still plenty of voices willing to make a full-throated defense of the need for infrastructure investors to focus on sustainability, both from an environmental and social perspective. Indeed, infrastructure investors, almost by definition, have to take a long-term view. So the need for infrastructure to be sustainable, in every sense of the word, is self-evident to many in the asset class. In practical terms, the increased frequency and severity of extreme weather events caused by climate change means the need to consider how assets can be made resilient is a growing area of focus. In this special episode, reported by Ben Payton and sponsored by Fingate Asset Management and Arcus Infrastructure Partners, I'm Ben Payton, and I'll see you next time. We'll discuss the path forward for sustainable investing amid all the controversy around ESG. To help us, we welcome Della Wang, Director for Responsible Investment at Fingate in Toronto. And from London, we're joined by Neil Kravitz, Partner and Head of ESG and Asset Management at Arcus. We'll discuss the appetite among LPs for sustainability, the challenges in meeting reporting requirements, the importance of embedding strong ESG performance standards in portfolio companies, as well as the need for managers to develop their skills in assessing climate hazards. Welcome to the Infrastructure Investor Podcast. One of the most fundamental questions that managers are asking around sustainability is whether it really matters to LPs anymore, given the criticism around ESG. Neil Kravitz is confident that sustainability does remain an LP focus, although he adds that there are geographic differences in how ESG is used. Della Wang agrees that sustainability is still a focus, but says LPs are getting better at zeroing in on what really matters.
Speaker 2We have seen that sustainability has remained at the forefront of their priorities in 2025, but their expectations have been more sophisticated and outcome-focused. There's a couple of ways we have seen this. One is LPs are seeking tangible evidence and case studies that managers are not simply treating sustainability as a tick-the-box exercise, but that there are meaningful. outcomes driven by sustainability in the investment decisions and investment outcomes itself. We've also seen that, you know, sustainability must be more authentic to your business model. So focusing on areas where you either have the largest dependency or the greatest impact. So facilitating all this is we're seeing greater dialogue between managers and LPs to create a more genuine connection versus, you know, sending a questionnaire back and forth. We're getting on calls and we're talking about things really to truly understand how sustainability plays a role for capital stewardship for both parties.
Speaker 1She adds that infrastructure managers, especially in the United States, have had to respond to the ESG backlash by adjusting their language without necessarily making fundamental changes to their sustainability strategy.
Speaker 2In some circles, ESG has become polarized, sometimes misunderstood, sometimes politicized, and occasionally even avoided altogether. So recognizing this landscape, what a lot of the firms in North America has done is to deconstruct ESG into its. So recognizing this landscape, what a lot of the firms in North America have done is to deconstruct ESG into its. constituent elements, such as physical climate risk, GHG emissions, responsible labor practices, especially for us, is very important. And each of those need to be addressed with targeted and measurable initiatives that directly correlate to value creation, risk mitigation, and portfolio resilience. So it's not a matter of just slapping ESG on your company's branding. It goes much deeper than that. And the close linkage between sustainability and value creation is also allowing us to simultaneously deconstruct the silos. Between companies' sustainability office and its investment and asset management function. So we're seeing a lot more collaboration between our different teams. And this is good in that it means ESG is not just viewed as an exclusive and sometimes siloed part of the organization, but really needs to be built into the firm's mission and your vision and goals for it to be sustainable as part of your business model.
Speaker 1In strengthening this business model, she adds that firms need to focus on having the right processes in place, including through investing in the right tools to help with sustainability challenges, such as assessing the vulnerability of assets to climate risks.
Speaker 2For more complex tasks, such as physical climate risk scenario analysis, as an example, we do employ advanced external tools and softwares that can streamline the data collection and then elevate the user experience. So, for instance, our investment team can input very straightforward asset information like coordinates, asset type, height of building into a software that we use and within minutes receive very detailed insights. if they're actually involved in the actual process of risk identification and risk management. of our portfolios and across our peers.
Speaker 1union regulators have led the way in developing ESG reporting requirements for companies. But concerns over the effect of regulation on competitiveness led the bloc to change course earlier this year. Its so-called Omnibus package delayed some ESG reporting requirements and removed many smaller companies from the scope of regulation. Kravitz has mixed views on whether these measures will succeed in simplifying ESG reporting.
Speaker 3It has simplified it in that I think the Omnibus has changed the parameters for the CSRD thresholds and also timing. And for a lot of smaller investee companies, that's definitely made life simpler. On the flip side, it has meant that what was going to be quite a widely adopted and common standardized approach is going to be less widely adopted. So I think that doesn't help in the standardization, but there's a real balance here. And even at the political level, you know, I think, whereas in previous years, the green agenda and a lot of the policy agenda was driven by that, there are other things taking up the commission's time, you know, well documented in the media. And those seem to be more of the focus. So the introduction of the Omnibus to me wasn't that much of a surprise because I think the push from regulators on that side has been less so now because they've been focusing on other things.
Speaker 1While it can be difficult for smaller companies to cope with the reporting requirements around ESG, he argues that infrastructure managers will often find it easier to change ESG practices at smaller companies than at their larger peers.
Speaker 3Certainly bigger businesses have generally, I would say, more resources in this area to be able to implement changes, but often they're also more established and more set in their ways and definitely far slower to change because they're just bigger, bigger organizations. Whereas mid-market infrastructure businesses are generally smaller. Often they're founder established and we partner with, and generally that makes them less mature, less professional in their approach to managing ESG. But that certainly makes them faster to be able to make change than bigger businesses, more entrepreneurial. They also often value the commercial benefits that quickly come from better, better sustainability management, and they're more responsive to being able to rapidly implement changes within their businesses. Size is also relevant. I think when it comes to leadership from a shareholder perspective for change, bigger infrastructure businesses generally have a larger number of shareholders where getting consensus amongst those shareholders and a drive for change is sometimes more difficult.
Speaker 1He argues that improving sustainability performance can be a key factor in boosting the value of an infrastructure business when the time comes for an infrastructure fund to exit.
Speaker 3What we're targeting at that point is a business that manages sustainability well themselves and are self-sufficient in being able to do that. And they've got also evidence of high performance in external assessments and on the path for future sustainability improvements. And what we've found is that it means that when we exit our investments after a number of years of growing and maturing them, generally that's either upper mid-market or large cap investors and the businesses have matured, from more value add to either core plus or core. And that allows the more passive owner to be able to see a very well-run business from a sustainability perspective and ultimately give credit to that in their acquisition pricing of that business.
Speaker 1And while some people might assume that management teams are more focused on financial metrics, he argues that measuring performance through tools like the GRESB assessment and benchmarking process will ensure that company leaders give ESG the attention it needs.
Speaker 3In our experience, even the most ESG-skeptical CEO generally is quite a competitive individual by personality. And what we find is when they start being scored out of 100 and ranked against their commercial peer groups, so say there's a fiber benchmark where there's nine participants and they've come third or fifth out of nine, they don't like that. And that certainly helps from motivation. Clearly, we're not only doing it for the motivation, we're doing it because we want to do it right and do it properly. But at that point, it really helps with the buy-in. And so that's part of why we do that. Of all the
Speaker 1items in the sustainability in-tray for infrastructure managers, one of the most important is climate adaptation. Even those who don't accept the reality of human-induced climate change will struggle to dispute the data showing that extreme weather poses a growing risk to property. The risks have been thoroughly demonstrated on countless occasions just within the last year. The wildfires that ripped through Southern California in January, for example, are thought to have caused economic losses totaling more than $50 billion. Wang says there is a clear need for managers to get better at understanding potential threats and taking action accordingly.
Speaker 2The industry and climate models are all getting better and better and more sophisticated around this. But what I will say is scenario analysis in and of itself is by no means a new concept for us. And investment professionals, we've always structured portfolios with diversification in mind, balancing asset types, geographies, industries to reduce exposure to any single risk factor. A climate-related scenario is no different. But what is different and what has been challenging for us is that historical trends and patterns no longer serve as an indicative data point for future outcomes and future frequency of events. So, you know, a hundred-year flood or fire could happen now every five to ten years. And we've seen that happen now, especially south of the border in the U.S., where we've seen floods and lots of increases in wildfires here, even in Canada, as I speak. So it's very important, but trying to understand and predict what exactly will happen, whether it's within your holding period or upon exit, is very difficult. And so climate scenario planning requires us to project oftentimes beyond our investment horizon. And so if you look at the different scenarios offered by the five shared socioeconomic pathway scenarios, the outcomes are widely different. And so how do you pick a lane and say, that's what I'm going to model? So that's always been a challenge.
Speaker 1She points out that managers can benefit from investing in tools and software to help predict the likely impacts of catastrophic climate events.
Speaker 2Tools like EarthScan, Climate First, has been really helping us with predictive analysis around what exactly is the potential outcome in 2040 under a business-as-usual scenario, aka the worst-case scenario. And so they take that information, and instead of giving us a one-to-five risk score, which to us really has no applicability, they provide an actual predicted, for example, flood inundation levels measured in millimeters. That is now useful to us. So if we're building a battery storage facility, or if we're building a water storage facility, or if we're building a water storage facility, or anything with a mechanical system, we know that we need to build it to an elevation level that can potentially withstand a certain flood height of X millimeters. So that's the type of information we're starting to collect and inform our technical and design teams on how to prepare our assets and future-proof them. It's just one example, but I think this is going to become table stakes for more and more asset managers, not just because LPs are asking this, but to even be able to sell an investment to another buyer. This is going to be the type of information that they're looking for.
Speaker 1Kravitz also believes that managers need to pay more attention to the possible impacts of extreme weather. Ultimately, he tells us, managers should walk away from investments if the risks to assets can't be adequately managed.
Speaker 3So even before we get into an investment, we're doing an assessment of what the potential for physical and transition risk is, and what the potential for stranded asset risks could be for that investment. And sometimes that's through the usual due diligence, but sometimes it's through the actual due diligence. So we're going to be looking at the future development in climate and specific to geolocations and the industries that we're looking at. For example, there was one specific investment that we were looking at that faced a heightened flood risk in a place that had flooded in the last 20 years. And under various climate scenarios, this was just one area that we couldn't get comfortable that this specific asset was a technology-related asset. So if it ever got wet, people would never be putting more technology in this location. So this was something that we did a lot of work on pre-acquisition.
Speaker 1But he says that although managers sometimes need to walk away from deals over climate risks, there is often scope to make investments around strengthening the resilience of assets. A fiber business, for example, could adapt by raising the height of fiber cabinets to help protect them from any flooding that might occur.
Speaker 3So these sorts of things are really both driven by an economic case for doing it, but with one eye on, okay, how do we adapt to a situation where we have more extreme weather events, more prospects of potential flooding, hotter summers? And those are the sorts of things that we're doing to protect and make our portfolios more resilient.
Speaker 1Wang notes that managers also need to screen carefully for businesses that will be unable to adapt to a world where assets are expected to have a realistic path to net zero. Infra firms will need to be ready to walk away from possible stranded assets, she argues.
Speaker 2Oftentimes, what we look at from a screening lens is, could this asset be adapted to various risks brought on or opportunities brought on by climate change, whether physical or transitional? So there have been instances where we believe that an asset is not well positioned to adapt to climate change, given the parts of the supply chain that it plays in in the fossil fuel sector. We did not see a viable path for it to be net zero by 2050. And therefore, we have declined investments like that, where the capital required to add CCUS or various technologies would not have benefited the asset in terms of return. So usually, we like to say, you know, let us come in and adapt an asset so that it can be better positioned for the future. But there have been instances where we've said no.
Speaker 1While it's easy to think about how climate change is a threat for infra firms, the asset class has proven adept at making sure opportunities don't go to waste. And Kravitz believes that adaptation investment is also an opportunity for the asset class. He uses the example of Arcus' portfolio company WorkDry to illustrate his point.
Speaker 3There's actually a very big opportunity in providing infrastructure structure as a shared resource that can be deployed in the face of extreme weather events to improve resilience. I mean, taking the example from WorkDry where last year there were very significant hurricanes in Florida, Milton in October, and the WorkDry subsidiary in Florida was pre-contacting its customer base saying, this is coming, do you want equipment? Can we help you build your resilience? So in advance of the weather front hitting, those customers were already prepared with the equipment to be able to defend themselves. So if you think about infrastructure in a way that it's really providing a resource that helps solve problems or gives certainty to communities, that's an incredible opportunity.
Speaker 1But at the same time, he does reiterate that managers need to think carefully about the risks as well as the opportunities.
Speaker 3Of course, this is a risk and you need to be very careful, I think, when investing in a concentrated location where you don't have diversification by geography. And also depending on the nature of your subsector that you're involved in, obviously a technology business is very prone to water issues. If you had a business in food related or chemicals, heat would be problematic. So I think you really need to think quite hard about what are the potential factors that could impact your business. So it's a bit of both, but I personally think there's a lot of opportunity for infrastructure investors to help the world deal with this because ultimately we're all going to have to adapt and that need for capital for adoption is suddenly there.
Speaker 1Wang also emphasizes the importance of diversification as a strategy to manage climate risks.
Speaker 2I think diversification is definitely important. In this case, you don't want to put all of your eggs in one basket. But while there's uncertainty in the potential outcomes of climate change and difference in climate patterns, I think everybody has now come to the realization that there is certainty in that climate change will impact climate patterns and ways that infrastructure will have to interact with the natural elements. So I think having that level of certainty, sadly and unfortunately, does provide confidence for investors like ourselves to chart a path forward in investing in resilience planning and investing in potential assets that can benefit from the opportunities that arise from assets having to invest heavily in adaptation measures. So while the output is uncertain, I think the direction is certainly set. The course has been set and that gives us enough to move forward with confidence.
Speaker 1With all the challenges that come with making infra assets more sustainable, it's easy to think that the powerful anti-ESG backlash might persuade investors to give up on their sustainability journey. However, Wang stresses that in fact, sustainability has never been as important to the infrastructure space as it is now.
Speaker 2I think given the recent political backdrop and the divergence of views around ESG, it really gives managers like ourselves a chance to reaffirm and reestablish our position as responsible investors by demonstrating that we believe it's inherently important as fiduciaries to take a lens of ESG and sustainability in our business for the sake of generating risk-adjusted returns and for the sake of building in strong communities and creating resilient societies. And so I think it creates a very special opportunity for us to differentiate. And I think a lot of firms are seeing this as an opportunity as opposed to a challenge. And certainly the challenges are there, but if anything, sustainability professionals are good at is sitting in a room of people that tell them no. And so I think we'll continue to do that, especially here in Canada, where we are seeing a lot of that devastation coming from physical events. We have countless wildfires up in Northern Ontario and that smoke is reminding us every day of why we're doing what we do.
Speaker 1And Kravitz concludes by saying that while some managers might use the ESG backlash as cover to walk away from sustainability, Arcus continues to believe that sustainability will add value to infrastructure businesses.
Speaker 3And I think for those people who've just viewed it as a hygiene exercise or a tick box exercise, the recent changes in the political landscape have given an opportunity to go, okay, that's not for us, but where it's not just hygiene and certainly we don't fall into that category where we really see managing sustainability well is a value lever. It's part of our wider asset management skillset that we deploy to deliver returns for investors. This is a chance to affirm that statement. We haven't changed anything that we do and investors certainly recognize that we're not having any issues or shortages of investors wanting to talk to us about sustainability.
Speaker 1So we can clearly see that the logic of focusing on sustainability remains apparent for many leading infrastructure managers. While politicians quibble over ESG, the challenge for the asset class is to focus on what matters most, not simply reporting data, but ensuring that assets are adapted to climate change and where it's possible to mitigate the damage. Indeed, with rapidly worsening climate impacts, the need for investors to focus on sustainability may be impossible to ignore for long. Thanks again to Della Wang from Fingate Asset Management and Neil Kravitz from Arcus Infrastructure Partners for joining us. If you want to hear more episodes, you can subscribe to the podcast wherever you like to listen or head to infrastructureinvestor.com. There you can also get all the news and analysis you need on the institutions, funds, and transactions shaping the asset class. This episode was produced by Charles Wayne and reported by Ben Payton. It was edited and narrated by me, Eric Fisch. For Infrastructure Investor, thanks for listening.
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