Driving performance with ESG

Integrating environmental, social and governance considerations into investment decisions has come in for some criticism, yet infrastructure investors cannot ignore the risks and opportunities, says Arjun’s Rhyadd Keaney-Watkins

ESG may have fallen out of favour with some investors, but in asset classes such as infrastructure, each element of the E, S and G can play into investment performance. This is not only true of testing downside risks and protecting the stability and income investors require but also in identifying long-term opportunities, says Rhyadd Keaney-Watkins, managing director and head of ESG at Arjun Infrastructure.

Q What does the backlash against ESG in some quarters mean for infrastructure investors?

The criticism levelled at ESG has brought about a necessary re-evaluation of how the strategy is described and, in some cases, implemented.

Cutting through the debate, for infrastructure the core truth remains that ESG factors can be a fundamental driver of investment performance. Infrastructure assets are physically exposed, capital intensive and deeply intertwined with customers, communities and regulators. ESG is not about ideology, it’s diligent underwriting.

ESG risks are also part of the core risk budget for essential infrastructure assets – and that differs by sector and geography. Therefore, we need to take a materiality-driven approach that focuses on the issues most likely to affect cashflows and value. That could be a focus on the potential for operational disruption from extreme weather, rising insurance costs and policy or technology shifts that alter terminal values. Reputational risk is equally important – private capital can only operate effectively in public services with a strong social licence. That means governance failures can quickly translate into regulatory friction, operational impacts and impaired valuations.

Q Is there a ‘necessary re-evaluation’ of the way ESG is described and implemented?

How ESG is implemented varies across asset classes, strategies and managers. For some, this focuses on ‘negative screening’ and exclusion. But, only by undertaking a nuanced assessment of evolving ESG factors can a manager truly shape and defend long-term valuations.

We should be clear-eyed, commercial and bold in advocating that integrating ESG is paramount to investment performance. Even the sharpest critics would most likely acknowledge that factors like future flood risk, carbon costs, health and safety as well as cybersecurity are prudent business checkpoints.

The very nature of infrastructure assets makes them particularly exposed to ESG issues. An obvious example is physical climate risk. Whenever we assess a prospective asset, we ask how it has performed during previous climate-driven extreme weather events. We then consider longer-term risk through a process of “scenario analysis”, anchored in best available climate models. This allows us to quantitatively assess the frequency and intensity of a range of extreme weather events, from flooding to drought, extreme heat and wildfires.

Events such as these can result in operability constraints, availability penalties, increased maintenance and repair costs; even insurability risks. These can be fundamental to long-term investment performance. Another example is transition risk. Policy, market and technology changes can, in extreme cases, lead to stranded assets or, at the very least, residual value erosion. We need to take a granular analysis approach to protect against this.

Q Why has impact investing escaped much of the criticism levelled at ESG?

Firstly, there are too many terminologies and definitions, whether that’s “ESG investing”, “impact investing”, “responsible investing” or “sustainable investing”. The risk is that practitioners overly focus on the technicalities, lose sight of the broader opportunities and are then unable to communicate clearly with investors.

Impact investing remains a much smaller part of the overall investment landscape. It’s smaller size, and more focused discipline, has allowed it to largely side-step the public and political scrutiny received by “ESG”. Impact investing also benefits from investors actively prioritising positive ESG-related outcomes, so integrating ESG will not come as a surprise to investors.

For well diversified and long-term infrastructure strategies, however, investors don’t necessarily need to choose between “ESG” and “impact”. I think it can involve both, and when integrated, can help deliver returns over the defensive base case.

Q How can infrastructure investors mitigate some of the adverse ESG impacts associated with digitalisation?

There are several aspects to this, and digitalisation is a broad term. For example, fibre-to-the-home is the most energy-efficient form of connectivity, and it’s durable and technologically superior. When fibre upgrades coincide with copper switch-off , they drive a step-change in network energy efficiency and maintenance intensity.

Then there are data centres. Energy use is the headline here, but there is also water use and embodied carbon in the build and fi t-out phase, for example. They’re all material considerations, but with proper asset selection and active asset management, these issues can be assessed and managed.

We’ve just made our first investment in data centres with a stake in a stabilised data centre portfolio operated by European focused Data4. The portfolio comprises operational hyperscale data centres in Paris, Milan and Madrid.

Data4 is actively addressing ESG concerns, including by committing to the Science-Based Targets Initiative, and as a signatory to the Climate Neutral Data Centre Pact as well as matching 100 percent of its energy use with renewable sources. It’s also innovated in the use of low-carbon foundations and other eco-design measures for its data centres – directly tackling the challenge of “embodied carbon”. We’ve found it be a business that really understands the ESG impact of its assets and actively taking steps to reduce those. Asset selection is key.

Q What are the opportunities and risks of ESG factors?

We invest in assets with traditional “real infrastructure characteristics”. They provide essential services, have long life spans and benefit from high barriers to entry, long-term contracted cashflows, inflation protection and low sensitivity to economic cycles.

Within this, we target sectors benefiting from strong sectoral tailwinds and alignment with the massive secular changes of our time – from energy transition to digitalisation. We work across key sectors such as renewables, circular economy, transportation, digital infrastructure and utilities. However, a granular approach is needed to assess opportunities within these verticals. For each opportunity, we test whether an asset is structurally aligned with these secular changes. This is about eliminating long-term systemic risk at the front end.

Moving into diligence, we start with a rigorous downside analysis to test the characteristics and assumptions that underpin cashflow reliability and, ultimately, returns. Using an ESG lens, that could be assessing whether there’s a capex gap associated with decarbonisation, or perhaps additional costs to consider in the event of future carbon taxation or improved emission requirements.

The opportunity then comes on top of that. There’s a lot of opportunity in renewable deployment, but we can also integrate biodiversity into that solution. The EU has a 500GW target for solar by 2030, which translates into roughly 500,000 hectares. Amarenco, one of our renewable platforms, illustrates this. The firm has over 600MW of capacity, with a pipeline to increase this significantly. In addition to generation, the company has commissioned one of France’s largest battery storage projects. Aside from supporting decarbonisation and system flexibility,

Amarenco is also driving biodiversity improvements through their in-house ‘ECHO programme’. The programme has been selected as a pilot for the emerging biodiversity credit market, and I expect to see growing demand from corporate off takers to meet broader environmental and sustainability commitments. Renewable developers able to deliver biodiversity credits, alongside renewable energy, may find a competitive edge to secure off take contracts, potentially at incremental pricing. This is a benefit for biodiversity and – by contracting cashflows – security for shareholders.

“Whatever ultimately replaces Articles 6, 8 and 9, we need to look beyond labels to better understand how strategies deliver real world outcomes”

Q How are infrastructure managers choosing where to focus in the energy transition space?

Everyone is talking about energy transition and digitalisation – and both are broad universes. Energy transition is a multi-trillion, multi-decade replacement cycle presenting numerous opportunities for investors. However, it takes discipline to isolate quality opportunities that fit our specific risk tolerance and deliver the long-term risk-adjusted returns this year and a decade from now.

With our core/core-plus mindset, one example of where we find potentially compelling opportunities are renewable platforms. But again, not all opportunities are equal. We seek high levels of contracted revenues and inflation linkage as well as material operational capacity in place across diversified sites. We want to see EBITDA positive businesses, with recurring operating margins from generation, not just development churn, and a proven management team to deliver pipeline.

Yet energy transition is about far more than generation. It’s going to touch every corner of infrastructure. All portfolios will need to act on energy transition, from a cashflow defence and growth perspective.

One of our portfolio companies, Bigadan, for example, produces biogas from organic waste that can be used to decarbonise transport. When upgraded to biomethane, it can be used to displace fossil gas in the grid. The company has already secured a contract with the Danish Energy Agency to capture 25,000 tonnes of the CO2 from its processes each year and store it under the seabed – further diversifying and building the revenue stack for the business.

Another example is installing EV charging infrastructure in strategically important locations, such as motorway services assets. Although motorway service areas may not be an obvious energy transition player, it’s role in decarbonisation transport, and the business opportunities this will present, can’t be overlooked.

Q What are the main sustainability trends that investors should look out for over the next 12 months?

The ongoing review by the European Supervisory Authorities of SFDR – particularly regarding the definitions of Articles 6, 8 and 9 – is a key area for infrastructure. In my view, the market has unintentionally adopted these classifications as a proxy for sustainability and impact. There’s a perception that an Article 9 fund has greater sustainability impact or credentials than an Article 8 fund.

Yet, infrastructure is far more nuanced and complex than this hierarchy would suggest. The system level risk of this is that it might lead to capital misallocation or a misalignment between what an investor believes an investment’s outcomes will be and the reality.

Whatever ultimately replaces Articles 6, 8 and 9, we need to look beyond labels to better understand how strategies deliver real world outcomes. Currently, a fund acquiring an operational wind farm that simply recycles equity into the asset without adding a single green electron could be classified under Article 9. This is despite having minimal real-world impact. Transitioning brownfield assets could be highly impactful yet potentially ineligible in an Article 9 fund. There are many important, purposeful, long-duration assets needing optimisation – therein lies financial and impact opportunity.

Extract from Infrastructure Investor November 2025 magazine