Infrastructure sector faces growing decarbonisation pressures

Gillian Frew and Stacey Collins of Pinsent Masons, the law firm behind Out-Law, said the growing imperative for infrastructure businesses to demonstrate how they and their suppliers are reducing carbon emissions and operating more sustainably stems from interventions by policy makers 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 Sydney Metro, for example, has outlined a bold sustainability strategy that includes putting environment and sustainability factors at the heart of procurement and ensuring requirements flow down the supply chain, while San Francisco Airport is a global leader in the airports sector in driving down greenhouse gas emissions, including most recently facilitating the use of more sustainable fuel by airlines.

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 in November 2021, an event which will coincide with the UK's presidency of the G7 next year. In a speech earlier this 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, according to Frew and Collins.

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. In the US, the Commodity Futures Trading Commission’s (CFTC) Climate-Related Market Risk Sub-committee earlier this month called on US regulators to "move urgently and decisively to measure, understand, and address" climate change risk to financial markets, and highlighted the need for financial innovation to help "channel more capital into technologies essential for the transition".

Frew said: "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," she said.

Collins said: "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," he said.

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.

Collins said: "Tenderers for global infrastructure projects are increasingly having to demonstrate their own ‘low-carbon credentials’, as well as those of their tendered solutions. The use of the 'CO2 Performance Ladder' in the Netherlands is a fantastic example of how a low-carbon business can be rewarded by having a better chance of winning work than its higher-carbon competitors. 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."

A panel of Pinsent Masons experts will discuss how the infrastructure market is adapting to a lower-carbon world at a webinar on 24 September.