ESG and Real Assets

Vincent Piché, Director at Castle Hall, recently participated in a panel organized by AIMA Canada, focused on the integration of ESG issues in Infrastructure and Property investing.

Vincent was joined by Alina Osorio, President & CEO at Fiera Infrastructure, and Sanjil Shah, CFO at Alignvest Capital Management and Managing Partner at Alignvest Student Housing, a Real-Estate investment trust focused on the Canadian Purpose Built Student Accommodation (PBSA) sector.

Key takeaways:

• The market for responsible investing is maturing. ESG is no longer a “tick the box” exercise; investors are asking more specific questions regarding the processes and resources of each investment firm considered for inclusion in their portfolios. Asset managers must prepare themselves to be more transparent about ESG integration.

• The constituencies focused on ESG are becoming broader. Sanjil Shah noted that tenants of his Student Housing project are catalysts for action on environmental issues. “They may not know what ESG is but they sure care about their electricity consumption and the waste they generate.”

• Millennials will be a key driver in making the responsible movement mainstream. Millennials are more aware of environmental and social issues than previous generations: over the coming years, they will experience one of the greatest wealth transfers in history (± $30 trillion).

• …But investors are still concerned about performance. Despite research suggesting a positive correlation between ESG performance and returns, the belief there is a penalty on performance when integrating ESG into the investment process remains the biggest barrier to broader adoption.

• ESG may drive innovative financing structures, including public-private partnerships. Fiera Infrastructure invested in the Single Room Occupancy project in Vancouver, a portfolio of 13 community buildings that house 900 low income residents. Alina Osorio stressed that the project would not have made sense financially without the participation of the Public Sector. This Public-Private Partnership was a success: it is profitable for investors and solves one of Vancouver’s most pressing social issues: affordable housing.

• Climate change may impact an investment thesis. Fiera monitors physical risks in its hydroelectrical holdings: as climate patterns change, so does the flow of water in rivers. The increased volatility impacts the productivity of these facilities. Investors will need to consider climate change scenarios to accurately assess their potential risk-adjusted returns.

• Short term or long term? Alina Osorio also discussed the dilemma concerning fossil fuel. Investors want to divest, but should they also divest from nuclear power plants? In the short term, nuclear has a beneficial environmental profile as compared to coal, but leaves a long tail exposure in relation to waste disposal.

• ESG needs greater standardization around definitions and measurement. There is no universal agreement as to what is a truly “sustainable investment”.

For more information on ESG due diligence, please contact Castle Hall at esg@castlehalldiligence.com