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February 15, 2011
Infrastructure and ESG: Are Trade-offs Inevitable?
    by Robert Kropp

Eurosif reports that financing of the infrastructure sector will require private investment, and recommends action to ensure that environmental, social, and corporate governance (ESG) considerations are addressed.

Eurosif, the European network of national Sustainable Investment Forums, has published an Infrast ructure Report detailing the major issues confronting the infrastructure sector.

According to the Organization for Economic Co-operation and Development (OECD), infrastructure will require $2 trillion in financing annually through 2030. As Eurosif's report points out, however, "Government spending in fixed assets has continuously decreased for the past 20 years." As this trend is unlikely to be reversed, creative ways of financing infrastructure will have to be developed to address such impacts as population growth, security, and climate change.

"As governments struggle to make ends meet," Eurosif stated, "Private investors are filling in the gaps for these projects, and the implications for environmental, social and governance (ESG) factors on the sector are intensifying."

Matt Christensen, Executive Director of Eurosif, stated, "Infrastructure assets are heavily affected by changes in ESG conditions and the sector has a critical role to play in addressing these issues. Infrastructure is a significant growth area of the future and private investors will play a key role in the absence of sufficient government financing for these projects."

The ESG issues studied in the report include bribery and corruption, environmental impact, and community relations.

According to the Transparency International Bribe Payers Index, "Public works and construction companies (are) the most corruption-prone when dealing with the public sector, and most likely to exert undue influence on the policies, decisions and practices of governments." Eurosif's recommends improved regulation and corporate governance, as well as "strict monitoring of lobbying practices," to offset the business risks associated with bribery and corruption.

Noting that "a total of 950 natural catastrophes were recorded" in 2010, "Markedly exceeding the annual average for the last ten years," Munich Re estimated that losses amounted to $130 billion. Addressing the impacts of climate change on infrastructure will require "that projects internalize the service costs of adverse environmental externalities," according to Eurosif, as well as a transition to green solutions for transportation infrastructure.

To maintain sustainable community relations, Eurosif recommends transparency on infrastructure development and partnerships to improve local economic situations.

In its report, Eurosif provides two case studies that illustrate the challenges and trade-offs necessary for the funding of infrastructure projects. In South Africa, where more that 90% of electrical production comes from coal, the effort to bring electricity to 100% of households has led to serious environmental impacts.

"The social benefits of access to electricity have been favored over greener forms of energy supply," the report states. "Nevertheless, Eskom (the national power utility company) has remained mindful of environmental issues," in particular through a customer awareness campaign on energy efficiency.

"Trade-offs can be unavoidable," the report observes.

In France, where a road linking Bordeaux to Pau was built and will be operated by a private firm, environmental impacts relating to endangered species led to "compensation measures to limit the impact on biodiversity," according to the report.

"The company is sponsoring economic development and landscape projects in the vicinity," the report continued.


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