By Judit Kuschnitzki
The incorporation of Environment, Social and Governance (ESG) principles in public-private partnerships (PPPs) promises to unlock important green funding sources, while also contributing to countries’ sustainable development.
The COVID-19 crisis has boosted governments’ interest in infrastructure projects, which can offer both short-term economic benefits, such as job creation, as well as longer-term advantages resulting from increased connectivity, education, and health, to name some examples. As such, infrastructure investments serve as a suitable stimulus measure, including in the Middle East and Africa.
Yet, in many parts of the region, limited fiscal flexibility and high sovereign debt burdens can pose obstacles to expensive mega-projects. An increasing number of political decision-makers are therefore turning to PPPs. Notably, PPPs allow governments to partially, or fully, outsource capital costs to the private sector, while maintaining legal ownership of projects.
Today’s economic and financial climate is particularly opportune for “green” and socially responsible PPP projects. Since the outbreak of COVID-19, there have been increasing calls from governments and industries for a “green recovery”.
Demands include infrastructure projects that are more resilient to external shocks, such as pandemics or climate catastrophes. In 2017, the OECD estimated that 60% of global emissions stemmed from infrastructure. This suggests that current investments in new and sustainable infrastructure will have a considerable impact on future emissions.
Innovative and sustainable infrastructure sits at the heart of positive change – a realisation that has gained a foothold in the corporate world as well. There is an increasing appetite for sustainable finance among large asset management and investment firms.
As a result, several conceptual tools and standards have emerged that aim to facilitate the sustainability of investments, including investments in PPP infrastructure projects. Among those, ESG principles are particularly prominent.
Since the Global Financial Crisis in 2008, ESG schemes and practices have grown exponentially, fed by the growing awareness that the private sector should contribute to solving today’s global challenges. If anything, COVID-19 has accelerated these trends.
According to a 2020 study by PwC, in a best-case scenario, ESG funds will experience a more than threefold jump in assets by 2025, increasing their share of the European fund sector from 15% to 57%.
The growth of ESG funds creates new opportunities for the launch of sustainable PPPs in the Middle East and Africa. The incorporation of ESG factors in PPP procurement processes, regulations, and contracts can unlock important financial resources.
A turn to ESG also promises to have an economic ripple effect, requiring private sector partners to assess and manage ESG risks and issues throughout their procurement and supply chain activities. Sustainable public-private partnerships could thereby catapult ESG into local economic organisations and structures.
Notwithstanding such potential, ESG is still lingering on the side-lines of many PPP activities. Often, government actors continue to view PPPs as a procurement tool used for traditional construction projects, where technical ability and costs outweigh considerations of sustainable development.
Where ESG assessments take place in PPP projects, they are often left for the winning bidder to conduct, after contracts have been signed. This undermines governments’ leverage and risks low commitment among private sector partners.
Governments could instead embed ESG criteria within their procurement processes, making ESG compliance a requirement for successful bids. In the UK, a procurement policy note was released last year, specifying that ESG elements account for at least 10% of the government’s overall evaluation of submitted proposals.
In the UAE, a similar first step was taken on February 3. The Abu Dhabi Investment Authority (ADIO) launched its ESG policy, which notably applies to PPPs in the emirate. The policy emphasizes six ESG factors, namely environmental risk management and sustainability, Emiratisation, worker and public safety, social development, business integrity, and human rights. Its goal is “to ensure that ESG risks and opportunities are appropriately considered and embedded in projects”.
Private sector actors involved in PPPs must demonstrate how they enhance ADIO’s six ESG factors through their proposed project. They are expected to report on their ESG activities, using key performance indicators (KPIs) and targets. The policy expects that the incorporation of ESG will enable increased flows of global investment into Abu Dhabi.
While the incorporation of ESG in PPP regulations is promising, it is no panacea. Specific requirements and thorough monitoring are needed to avoid the risk of “greenwashing”.
Moreover, there is room to further develop ESG, especially in its application to PPP projects. For instance, the relationship between ESG criteria and other sustainability frameworks, such as the UN’s sustainable development goals, could be both clearer and stronger. Similarly, viable alternatives could be incorporated and/or foregrounded, such as UNECE’s “People First” PPP standards.
Moreover, ESG criteria could be revised to better account for the long timeframes of PPPs and related questions of inter-generational equity. Existing ESG frameworks frequently focus on the present tense and are at risk of measuring only those factors that are easily quantifiable. To improve their impact on PPPs’ sustainability, ESG methodologies must be innovative and adaptive.
Greater integration of ESG principles in PPP procurements, investments, and contracts creates new opportunities for “green” and socially responsible PPPs. New sustainable partnerships can serve as a catalyst for ESG compliance across local economies. This is of particular importance in parts of the Middle East and Africa, where the application of ESG is still in its infancy.