Gillian Frew: New imperative for infrastructure businesses to tackle climate change
Construction companies, engineering firms and other businesses active in the infrastructure sector stand to lose out on funding, investment and major government contracts around the world unless they take a more active role in the fight against climate change.
A growing imperative for infrastructure businesses to demonstrate how they and their suppliers are reducing carbon emissions and operating more sustainably stems from interventions by policymakers and regulators in light of the Paris Agreement.
The Paris Agreement, signed by over 190 countries around the world, aims to limit global warming to 1.5°C and has been widely interpreted as requiring global carbon dioxide emissions to reach net-zero by 2050.
In Europe, initiatives such as the European Green Deal have followed, with the promise of further related regulation impacting all sectors of the economy, while the UK government has set statutory targets to reduce the country’s greenhouse gas emissions, with Ireland set to follow with similar legislation of its own.
Many businesses have chosen to move ahead of the regulatory agenda and stepped up their own commitments to reduce their carbon footprint, including infrastructure owners and operators.
The political momentum is likely to build further behind the decarbonisation agenda ahead of the 26th UN Climate Change Conference (COP26) to be held in Glasgow next November, an event which will coincide with the UK’s 2021 presidency of the G7.
In a speech last month, economic secretary to the UK Treasury, John Glen, said it is the UK government’s ambition for “interoperable global standards to drive forward the transition to net zero while providing the opportunity for UK asset managers to become global leaders in this field – capturing the opportunity from green finance within the UK market”.
Regulation designed to promote sustainable finance and measures to put environmental, social and corporate governance (ESG) factors at the heart of investment decisions and the award of public contracts will only increase the pressure on the infrastructure sector to take action.
Infrastructure funds in particular in Europe will soon be subject to transparency and disclosure obligations aimed at promoting the integration of sustainability risks into the investment process. When coupled with new requirements for trustees of UK pension schemes on climate risk governance and reporting, ESG practices will become subject to ever sharper scrutiny from large investors.
Energy transition is critical for all infrastructure companies. As energy users, infrastructure companies will see increasing pressure from investors, funders and governments, firstly to understand and report energy use, and secondly to pursue active decarbonisation of their business and supply chain. Energy transition is also an opportunity for infrastructure companies to play a leading role in decarbonising our built-environment and participate in the large and small projects needed to deliver carbon reduction and clean energy production.
Stakeholder pressure will continue to fill the gap where governments may be inconsistent or slow to impose ESG requirements. This pressure will only increase as ESG takes a central part of the credit analysis for investors and funders.
Companies ought to be taking steps to assess their own carbon footprint, as well as the carbon footprint of the processes, services and products they offer. This is often not straight-forward, and involves analysing the carbon cost of your supply chain. However, understanding your business’ carbon footprint is only the first step, and many companies are currently wrestling with how to decarbonise in a manner, and on a timeline, that is financially realistic for them.
That said, it’s clear that the political, social and financial cost of carbon is increasing at pace, so a longer term view is needed – companies with a large carbon footprint will have to adapt or risk being phased out of the market by ‘greener’ competitors.
Beyond the push towards greener finance, governments and businesses behind major projects are also beginning to make greater use of levers at their disposal to reward companies committed to lowering carbon emissions.
Tenderers for global infrastructure projects are increasingly having to demonstrate their own ‘low-carbon credentials’, as well as those of their tendered solutions. Many government procurers, and large private procurers, already assess ‘carbon-factors’ in their procurements, or have plans to do so in the near future. Being a low-carbon business is becoming more than a good marketing tool – it is fast becoming essential to winning work.
Gillian Frew is a partner at Pinsent Masons