Not Our Problem
About five years ago a large number of planners, designers, architects, and engineers were gathered at a conference hosted by the Zofnass Program for Sustainability at Harvard University’s Graduate School of Design. The theme of the conference was Infrastructure Sustainability. There were more than a dozen distinguished speakers including a director of research for a prominent rating agency. His remarks were preceded by panels of experts in sustainable design. Each speaker, including the author of this article, was convinced that they were doing their part to change the world, one high-impact infrastructure project at a time. It was a love-fest.
And then we heard from the rating agency. His remarks included rudimentary points about project finance and bond ratings. When asked if sustainable design would make a difference from a rating perspective. The answer came quickly, “No.” He went on to say that his agency, “was not interested in factors like social and environmental benefits associated with the projects we rate.” What? Our work doesn’t matter (we all thought)?
There was a follow-up question, “What if there were billions of dollars in demand for investment opportunities in high-impact infrastructure and building projects. This demand would come from investors that also want objective and transparent ratings?” His answer was, “That would be different.”
A Teeming Market
Fast forward to today where the need for infrastructure and building investment is now in the trillions of dollars in the US alone, and tens of trillions worldwide. It’s also a time when interest in SRI, ESG and Impact Investment vehicles is higher than ever. According to Bloomberg New Energy Finance, the historic green bond issuance rate climbed from under $3 billion in 2007 to a $40 billion plus by the end of 2014 (triple the volume issued in 2013 – also a record year). Bloomberg describes the green bond universe as made up of: Corporate self-labelled, Green Asset Backed Securities, Supranational/international, Government including national, regional or local governments to finance green projects, and Project bonds backed by cash flows of an underlying renewable energy project or portfolio of projects.1
It’s also a time when the traditional roles and responsibilities of fiduciaries and the legal obligations of asset managers are being reconsidered. Five years ago, it was common to hear that fiduciaries were legally compelled solely to maximize financial returns. That was the common assumption, but not really the sole focus. According to attorney Keith Johnson, who specializes in fiduciary duty, in a paper written together with International Institute for Sustainable Development, “One of the fundamental fiduciary principles of the duty of loyalty is impartiality between different beneficiary groups, including different generations (Hawley, Johnson and Waitzer, 2011). Given the potential for shifting of wealth, environmental remediation costs and climate risks between young and older generations, failure of fiduciaries to adopt a sustainable development investment approach has fiduciary duty implications and raises questions about the ability of fiduciaries to efficiently allocate investment capital to growth opportunities and manage risks to economic growth and future portfolio returns.”2
A Closer Look
It is critical that fiduciaries look closer and not just consider financial risk and returns but also sustainable returns associated with investments under consideration – also known as the “Triple Bottom Line.” That includes the tangible and less tangible but extremely relevant costs and benefits associated with SRI, ESG and impact investments.
These costs and benefits are always a consideration in corporate or public sector capital investments in facilities, buildings, and infrastructure. They are significant projects, generally having long-term financial, social, and environmental, even resilience implications. Related costs, benefits, and risks reach beyond energy sources, consumption and residual impacts. Sometimes they include water consumption and wastewater produced. There are other factors including community health, worker productivity, safety, urban heat island risks, and even brand risk among the less-tangibles that can be calculated and presented over a range of probable outcomes. These outcomes are often important and material to corporate decision-making, community interests, and are relevant to investor goals.
These values are captured through benefit-cost and risk analysis (BCA is the global default standard for infrastructure, buildings and facilities valuation). The process is complex, time-consuming and expensive, and often requires specialty consultants the cost of whom may only be justified for major projects (assume $100+ million in capital costs). These costs are a major barrier to inclusion of BCA for high-impact infrastructure and buildings in green bond and other investment portfolios. Recent experience with a US Department of Transportation merit-based grant program known as TIGER (Transportation Investment Generating Economic Recovery) offers a glimpse at investor emphasis on the need to reveal the full value associated with projects in the built environment. “The TIGER program enables DOT to examine a broad array of projects on their merits, to help ensure that taxpayers are getting the highest value for every dollar invested.”3
This heavily oversubscribed program requires that “applicants detail the benefits their project would deliver for five long-term outcomes: safety, economic competitiveness, state of good repair, livability and environmental sustainability.”4 DOT feedback to applicants states that, “The best applications are often prepared by transportation agencies that have used in-house economic expertise and benefit-cost analysis (BCA) to influence design of the project from the beginning. All applicants should also consult the TIGER BCA Resource Guide… ”5 This example is relevant to due diligence demands on fiduciaries in that it offers proof of demand for less tangible data in investment analysis while reinforcing the point that BCA is used to determine total or full value.
Cost of Due Diligence
The cost and time required for due diligence are often the reason cited for placing little to no emphasis on comprehensive Triple Bottom Line analysis of capital investments in facilities. Larger projects may be able to justify the expense; however, most infrastructure investments involve smaller projects valued at less than $100 million or even $10 million. Emerging technology and best practices are addressing the challenge of Triple Bottom Line (TBL) assessments.
AutoCASE® is a cloud-based automated Benefit-Cost and Risk analysis tool. When linked to design software including Autodesk Civil 3D, Infraworks, and Revit Building Information Modelling (BIM) products, project planners, designers and financial analysts can run real time TBL business cases. Massive amounts of data can be harvested from BIM products for TBL analysis.
AutoCASE produces TBL valuation assessments at a small fraction of the cost of custom studies, enabling users to run cases early and often throughout project development, commissioning, and long-term operations. Users have the ability to access TBL outputs that include the Net Present Value (NPV) of financial returns as well as the NPV of externalities and the Sustainable Return on Investment. Each category of value can be subdivided by project stakeholder (i.e., owner, investor, community, environment, taxpayer) to answer the “What’s in it for me?” question that tends to lead to project opposition and delays.
Technology is solving a problem for fiduciaries of investments that have sustainability or climate risk reducing elements while making it possible to design for optimal Triple Bottom Line outcomes. It addresses fiduciaries’ concerns relative to the cost of due diligence while addressing challenges associated with facility performance measurement, monitoring and reporting.
John Williams is Chairman & CEO of Impact Infrastructure, Inc., with offices in New York City and Toronto. The firm is partnering with software giant Autodesk at the center of a movement to bring solutions including AutoCASE to the global marketplace.
1 Green Bonds Market Outlook 2014, “Blooming with new varietals,” 2 June 2014, Bloomberg New Energy Finance
2 Johnson, Keith. “Introduction to Institutional Investor Fiduciary Duties,” The International Institute for Sustainable Development, http://www.reinhartlaw.com/Documents/art140402%20RIIS.pdf. Pg. 10
3 US Department of Transportation, About TIGER Grants, https://www.dot.gov/tiger/abouttigergrants. Pg.1
5 2013 Benefit-Cost Analysis Guidance for TIGER Grant Applicants, https://www.dot.gov/sites/…TIGER%202013%20NOFA_BCA%20Guidnace_0.pdf