Direct Infrastructure

We have assessed our portfolio for risks and opportunities arising from the global transition to a low-carbon economy. This assessment was based on the Intergovernmental Panel on Climate Change (IPCC)’s Representative Concentration Pathway 2.6 (RCP 2.6), which represents a ‘high-intervention’ future, with deep decarbonisation pathways. Some of the cross-sectional, as well as sector-specific, drivers are shown below. As these drivers reflect policy updates, market transformation and technological change, they are expected to play out over a medium-term timeframe (i.e. 10+ years); however, they also represent risks that can change quickly once commenced (e.g. the use of petrol vehicles and the associated impact on the supply chains of our liquid storage facilities may show a gradual increase at first, followed by sharp acceleration, ultimately resulting in a transformed market over the medium- to long-term).

Cross-sectional drivers of transition risks:

• Financial institutions, lenders, insurers and investors requiring climate risk disclosure or commitment to reduced emissions as part of financing conditions.
• Carbon pricing mechanisms and transition to low and no-carbon energy sources impacting energy end users.
• Pressure through supply chains to respond to energy variability and associated costs.
• Introduction and enhanced use of energy efficiency technology to reduce energy intensity.
• Reputational impact from investment in, or association with, companies/sectors that are lagging in management of climate risk.

Sector-specific drivers of transition risks:

• Transport: rise in electrification as well as shift away from fossil fuels to low and no carbon fuels (biofuels, hydrogen, hybrid); shifts in consumer preferences away from fossil fuel intensive travel; transition away from fossil fuels impacting global demand and supply chain; transformation of transport sector towards increased use of autonomous vehicles and ride sharing.
• Utilities: increased scrutiny of utility performance in the face of increasing demand and change in energy mix; transformation of energy sector enhancing or hindering capacity of gas networks (depending on speed of transition to electrification); energy-intensive processes and plants impacted by increased costs associated with newly introduced carbon pricing mechanisms.
• Storage: increased electrification reducing demand for petrol and diesel – bulk terminal may start to play larger role in domestic fuel supply chain during transition; transition away from liquid fossil fuels impacting global demand and supply chain.
• Renewables: renewable energy outpacing coal production to represent greater proportion of energy mix, due to declining production costs; readiness to capture incentives and subsidies for renewable energy production.

We have also assessed our portfolio against various physical risk exposures resulting from climate change. As expected, these are highly regional and asset-specific. The most common physical risk exposures related to rising sea levels and extreme rainfall, flooding and inundation. The timescale for that assessment was long-term (typically between 2050 and 2080 depending on the data available for each location).

In 2020, we conducted an asset-by-asset assessment to identify the physical and transition risks and opportunities across the portfolio. With assistance from external expert advisors, the assessment was designed to be in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. We used scenario analysis to guide the work, based on the IPCC’s RCP scenarios as described here.

The regions in which our businesses operate were first assessed for risks arising from the physical impacts of climate change, including extreme heat, drought, wildfires, sea-level rise, extreme rainfall and storms. A high global-warming scenario was used for this: the IPCC’s “RCP 8.5” scenario. Frequently referred to as “business as usual”, this scenario is based on a high-emissions future, and suggests a likely outcome if society does not make concerted efforts to cut greenhouse gas (GHG) emissions. Though we hope such a situation can be avoided, a high-warming scenario is typically considered the most prudent when assessing physical risks. On top of this initial assessment, all portfolio companies are now asked to conduct a detailed physical risk assessment and integrate conclusions into their plans and business strategy. This allows for a more granular physical risk assessment, as some of the physical impacts of climate change are very location-specific, followed by a value at risk assessment and resulting plans for necessary adaptation measures.

Secondly, all assets were assessed for risks and opportunities arising from the global transition to a low-carbon economy. Here, the IPCC’s “RCP 2.6” scenario was used: a high-intervention future, in which GHG emissions decline rapidly, in line with the goals of the Paris Agreement. This future is based on deep decarbonisation pathways and represents the most disruptive scenario with regards to policy drivers, market transformation, and technological change. Our analysis looked at cross-sectional and sector-specific drivers of transition risk, as described above.

The chart below summarises the results of the assessment, showing transition risk exposure on the x-axis, physical risk exposure on the y-axis and the level of organisational maturity regarding climate governance in the colour scale.

As a cornerstone of our ESG approach, we developed our Five Minimum Standards for ESG performance. These are universally applied to all Igneo portfolio companies, and each company is encouraged to set additional and more specific targets and action plans, and is required to report on progress with a focus on continuous improvement. One of these five minimum standards is Climate Change, focused on reducing GHG emissions and improving environmental standards, which has become the starting point for our portfolio companies to develop short, medium and long-term climate-related strategies aligned to their businesses. In terms of how we integrate climate-related risks and opportunities into our investment process, we strongly prefer investing in improvement over negative screens or exclusions. Our approach is grounded in a philosophy of improving ESG performance in order to reduce risks and generate long-term value, rather than excluding certain companies or industries altogether. For example, we do invest in hydrocarbon-based industries, or companies that may be facing ESG challenges such as high emissions, but will only do so if we believe the business is sustainable in the long term and that we can make a significant and positive impact to the ESG performance going forward.

We target sole, lead or co-lead roles in portfolio companies, often with 100% ownership or management. This gives us the distinct advantage of being able to engage directly with our portfolio companies via board representation and meetings with management, and enables us to proactively engage in all aspects of the business, including climate-related risks and opportunities.

As part of our proactive asset management strategy following acquisition, we aim for each portfolio company to deliver on the action plan outlined in our program ‘Climate Action 1, 2, 3!’. Most particularly to addressing the physical and transition risks of climate change is Action #2 – a goal for each portfolio company to conduct detailed climate change impact assessments (addressing both physical and transition risks) and integrating an appropriate response into their business plans and capex plans. The ongoing assessment of physical and transition risks will be addressed in Action #3 – improved governance relating to climate change impacts. Further detail can be found on our climate strategy, ‘Climate Action 1, 2, 3!’ in the targets and objectives section below.

In 2020, we set a target to reach net zero GHG emissions in our portfolio by 2050 or sooner. This target covers 100% of the AUM of our portfolio.

Recognising the need for progress well before 2050, we devised ‘Climate Action 1, 2, 3!’, an action plan setting out the steps we want all our portfolio companies to take by the end of 2023 to deliver short- and medium-term progress towards our goal. The three actions are set out below.

Action 1: Targets – devise a roadmap for achieving alignment with a net-zero emissions pathway, including short- and medium-term emissions reduction targets.

Action 2: Risk Assessment – complete a detailed climate change risk and opportunity assessment and integrate conclusions into business plans.

Action 3: Governance – put in place measures to achieve strong governance of climate-related risks and opportunities.

All companies must set a long-term goal consistent with the portfolio achieving net zero by 2050 or sooner, short- and medium-term targets and a transition plan. We will be working with companies who have not set such targets to do so by the end of 2023.

We track our progress firstly by annually reporting the proportion of the portfolio that has achieved the various aims of Climate Action 1, 2, 3! For example in our 2021 ESG Report, we reported that 17 out of 25 of our global portfolio companies had set net zero targets; up from nine the previous year.

We also measure and monitor metrics such as total emissions, carbon footprint and weighted average carbon intensity. These metrics are measured for the entire global portfolio, as well as each individual strategy. Our 2021 ESG Report also provided a projection of the emissions outlook for the portfolio when we apply firstly the announced interim emissions-reduction targets (as at 2030) and secondly the long-term or net zero targets (as at 2050). We acknowledge, however, that our portfolio changes year-by-year with acquisitions and divestments, and that each change can have immediate and material impacts on the various metrics that we monitor. As such, the projections do not represent a target. Additionally, we have a goal to increase investments in climate solutions over time.