Exploring the role of ESG for the performance and risks of infrastructure investing: evidence from the international funds' market

Abstract

PurposeThis study investigates the relation between ESG-driven investment strategies and the performance of infrastructure funds. More specifically, this study examines the impact of the different dimensions – environmental (E), social (S) and governance (G) – of the ESG profile of infrastructure funds on their performance.Design/methodology/approachTo study the risk-return properties of infrastructure funds and the relationship with their ESG profiles, an econometric analysis is conducted, based on a sample of 180 listed, ESG-oriented infrastructure funds identified through Refinitiv Eikon.FindingsThe results show that infrastructure funds with more solid environmental investment policies experience a lower performance, while those with a stronger social orientation yield a superior performance. Governance-related investment policies seem trivial in determining the performance of these funds. Further analysis shows that ESG controversies have a negative impact on infrastructure funds' performance, whereas Emissions and Resource Use scores, both proxying for different elements under the environmental pillar, have opposite signs. Finally, the Community score has a positive impact on funds' performance consistent with the positive impact of the social pillar score. The study also provides a number of sub-sample analyses to shed light on the conditions under which each pillar has significant impact on funds’ performance.Practical implicationsFirst, infrastructure funds should choose the composition of their portfolio holdings in a way that the total return is not penalized by the prevalence of the tricky E aspects (compliance with environmental regulations) over the main benefits of the S dimension. Second, fund managers need to bet on infrastructures with an expected impact on the social pillar dimension such as those aimed at promoting the wealth of the local communities (e.g. hospitals, schools). Third, to strengthen the fund's social dimension, fund managers must increase the dollar amount of the assets under management to count on a higher firepower.Originality/valueThis study makes three contributions to literature. First, the ESG profiles of the infrastructure funds operating both at local and global level and their relationship with annual performance are studied. Second, the different dimensions of the ESG profile of infrastructure funds are investigated by measuring their impact on performance. Third, the study sheds light on some detailed but relevant aspects of this phenomenon by analyzing the breakdown of the ESG profile of infrastructure funds into four sustainability sub-scores capturing their efforts to reduce CO2 emissions, the use of polluting materials and to influence local communities as well their exposure to the risk of litigation due to the occurrence of ESG controversies. This study addresses the extent to which the adoption of ESG investment policies by the infrastructure funds have an impact on their performances.

Guest editorial: A short review of the role of ESG activities in business and research

“…The papers included in the special issue lead us to the following future directions on ESG research. Future research may focus on further analysis of ESG-related activities in infrastructure funds and identify the role of various sub-facets of ESG activities, such as green investments for eco-innovation, technological development or greenwashing, that can be important factors influencing fund performance indicators (Baldi and Lambertides, 2024; Swinkels and Markwat, 2024). As ESG disclosure starts to play an important role in decision-making, clearer guidelines and regulations are needed to make information more reliable and comparable.…”

“…Five papers accepted for the special issue explore the relationship between ESG-related information and performance indicators. Baldi and Lambertides (2024) investigate how investments in companies involved in ESG impact the performance of infrastructure funds. The authors conclude that strong social orientation and practices positively affect fund performance, governance-related investment policies do not significantly influence fund performance, and environmental investment policies are associated with lower performance results.…”