Keynote Interview with Jean-Francis Dusch, Chief Investment Officer, Infrastructure Debt at Edmond de Rothschild Asset Management
Delivering strong sustainability performance is a key part of the job for infrastructure debt managers, says Edmond de Rothschild’s Jean-Francis Dusch.
Sustainability has become an increasingly important concern and objective for infrastructure investors in recent years, especially in Europe. This focus also extends to infrastructure debt, where ESG KPIs and impact measurements often form part of borrower covenants.
Jean-Francis Dusch, Global Head of Infrastructure and Structured Finance at Edmond de Rothschild, as well as CIO of Infrastructure Debt and CEO of Edmond de Rothschild (UK), sees few signs that any backlash against ESG will affect how European investors approach sustainability. On the contrary, he sees a growing range of opportunities, with sustainability acting as a cross-cutting theme across asset types.
Why does sustainability matter to infrastructure as an asset class?
Sustainability has always been embedded in infrastructure. In the early 1990s, when I started my career, projects had to respect the Equator Principles, and sometimes they did not go ahead if they could not comply with those standards. In the early 2000s, when public-private partnerships were prominent, ESG was already a very important part of feasibility studies.
For example: will a toll road create unacceptable noise? What jobs will it create? Will it affect flora and fauna?
We talk a lot about the energy transition, but it really started at least two to three decades ago. What we realise now is that sustainability cuts across all sectors, and so does the energy transition. Renewable energy generation is, of course, the obvious area to invest in. But there is also storage and grid distribution, energy efficiency, green fuels, green mobility, hydrogen, decarbonisation of utilities and the circular economy.
In Europe, there are new technologies and types of infrastructure to finance, but sustainability has always been a key topic for those working in infrastructure.
Are there differences in how debt and equity investors can approach sustainability in infrastructure?
There is alignment in how investors approach sustainability because, ultimately, both equity and debt investors are backed by institutions with ESG goals and convictions. They seek to design and implement a sustainable capital structure to make projects a reality.
The Sustainable Finance Disclosure Regulation, which came into force in March 2021, applies to both equity and debt asset managers and investments. It is designed for institutions backing both equity and debt strategies.
When considering how to measure impact, both equity fund managers and debt holders may apply similar criteria and methodologies. As a debt provider committed from inception to the energy transition across all sectors, when we finance a project, we place significant pressure on equity holders to meet ESG criteria and provide all the data required for us to report comprehensively to our investors.
For some utilities, we may want to see specific ESG KPIs, such as phasing out reliance on fossil fuels over a defined period.
Which sectors are exciting from a sustainability perspective?
We try to balance our portfolios. For an energy transition strategy, we could build portfolios that are 80% to 90% made up of renewable energy generation assets. But we do not do that, because our job is also to create sector diversification. We have therefore expanded beyond renewable generation.
For example, we made an early move into battery storage, focusing on a small plant in Belgium. This resulted in a fossil-fuel plant being replaced by a new renewable plant. In doing so, we contributed to the important issue of energy independence and security.
“What we realise now is that sustainability cuts across all sectors, and so does the energy transition.”
Hydrogen is also very interesting. Earlier this year, we made an investment in green hydrogen that we believed was right for our investors, after seven years of analysing the sector and determining the terms and conditions under which we would make our first investment within the risk profile of the mandates we are granted.
We had to be careful about mitigating the key risks and structuring the debt, taking into account construction risk, the technology, the quality of the offtake structure and counterparties. It was also a question of having the right sponsor and sizing the debt conservatively, especially as this remains a new sector.
Another first-to-market initiative was financing the transformation of methane. For example, there are closed coal mines in northern France where high-pressure methane can be captured before it is released into the atmosphere. Methane is 84% more harmful than CO2 when released. We identified and partnered with a company operating on these closed mines to capture and treat methane to generate energy services, such as clean renewable district heating.
We value such opportunities because the energy transition is also about transitioning existing assets. Being able to transform such sites and generate clean energy services is crucial. It is part of the circular economy and about turning a brown asset into a green one.
People often assume that debt investors have less direct influence on the sustainability performance of assets. Is that perception fair?
It is true that we are not going to set the strategic direction because we do not appoint management teams, hold board seats or run the project companies we finance. However, because infrastructure debt is covenanted — meaning that obligations are placed on the borrower — we can impose KPIs to ensure that borrowers achieve sustainability objectives that are important to us and our underlying investors.
It then becomes a question of ensuring that we have enough voting rights within the pool of lenders. Whether we are the sole lender, part of a limited club of lenders, or an arranger in a broader syndicate, we will have reserved or veto rights to ensure that we retain some control. Therefore, the perception that lenders have no influence is incorrect to a certain degree.
Debt investors also have discretion to select assets in line with their investment strategy, ESG convictions and investors’ goals. On day one, we require borrowers to complete an ESG questionnaire, so that we have the right information before pursuing an opportunity.
Our ESG process begins with asset selection. It then extends to the structuring of specific ESG covenants, closing the deal, measuring the ESG impact of assets — such as avoided CO2 emissions, alignment with global warming reduction targets and progress towards key UN Sustainable Development Goals — monitoring performance and ultimately reporting comprehensively to our investors in line with their internal and regulatory constraints.
“I think in the infrastructure world, whether you are doing transport, social infrastructure, energy, digital infrastructure or utilities, everything is going to become more interconnected.”
Has the ESG backlash had any effect on how infrastructure investors consider sustainability?
Europe, where we have made most of our investments, has been clear that it is betting on the energy transition to support economic growth. This bet appears to be paying off. Regulations such as the SFDR provide incentives for institutions to supply the additional liquidity needed.
If you look at the EU’s Fit for 55 package, which aims to reduce CO2 emissions by 55% by 2030, it proposes €1 trillion of investment over the next four or five years.
In Europe, the purpose of ESG and the energy transition is not being challenged. Nor is the need for essential energy-transition infrastructure.
A bigger issue is obtaining all the information from borrowers needed to report efficiently to investors. Taxonomy requirements are, in principle, easy to comply with, but many have realised that providing all the data required by the regulation is more challenging. The SFDR is also evolving, so we are aware that the ESG framework remains a work in progress and will continue to develop over time. However, I would not say there is a real backlash against the regulation.
Reporting requirements can also be time-consuming. Some of the data we need to compile and provide is complex, and investors may have different requirements. However, while reporting requires effort, we are talking about responsible investments. We must be disciplined, act as role models and equip ourselves to provide the necessary data.
Investor appetite for SFDR Article 8 and Article 9 funds is clearly present and growing.
“AI is going to help process all the data that is essential for monitoring increasingly complex assets across the whole spectrum of the energy transition.”
Looking ahead to the next few years, how will the sustainability space evolve?
Everything is going to become even more interconnected. Artificial intelligence will help process the data essential for monitoring increasingly complex assets across the energy-transition spectrum, including energy consumption, the grid, energy efficiency and green mobility.
This includes areas such as EV charging networks, which rely on a dedicated cloud environment to manage information across the network.
In the infrastructure world, whether the focus is transport, social infrastructure, energy, digital infrastructure or utilities, everything will become more interconnected. The smart city is becoming a reality. It is something I have discussed and envisioned for the past 15 to 20 years.
For me, this is the epitome of sustainability and sustainable infrastructure: to contribute to building a sustainable world that is essential for future generations.
