Building a better future in rail through ESG

Rail is booming. Multibillion-dollar rail projects are in development across the continent. Rail is also evolving, with new environmental, social, and governance (ESG) concerns to consider.

On January 26, 2023, Mott MacDonald, a Technical Advisor of the London-based International Project Finance Association (IPFA), was honored to co-host the event “ESG in rail infrastructure” in Toronto. The event brought together three professionals well-versed in this industry for an informative panel discussion:

• Jim Pass, Senior Managing Director, Head of Global Infrastructure and Project Finance at Guggenheim Investments
• Steven Robins, Head of Strategy at Canada Infrastructure Bank
• Charl Van Niekerk, Executive Vice-President, Transit at Infrastructure Ontario

A hot topic

There’s currently a lot of buzz around ESG — and a lot of questions. Firstly, what is ESG and is it different from sustainability? When creating infrastructure, what climate change concerns need to be addressed? What is the social impact on the public while the infrastructure is being developed, and how will they use it once it’s built? Who ultimately decides what standards need to be met? The panel touched on many of these points and more:

“I think sustainability has a different definition for everybody,” said Jim. “It’s definitely evolving, just like ESG continues to evolve. At Guggenheim, when we think about sustainability, we focus on: What are we doing? Is it right for the stakeholders, the shareholders, and the project together?”

At Infrastructure Ontario, the overarching idea is how to build infrastructure with long-term considerations, balancing up front capital cost and schedule with long term maintenance and beneficial use. The focus is on spending the taxpayers’ money responsibly to realize benefits at good value. “ESG can’t just be a framework, can’t just be a file sitting on a shelf somewhere,” Charl said. “It has to be entrenched in the culture and in everything we do.”

The Canada Infrastructure Bank (CIB) released its first sustainability impact report in December 2022. As an outcome-based investor, a large component of the CIB’s returns come from measuring the public benefit, such as greenhouse gas reductions and the number of Indigenous communities in which it has closed an infrastructure gap. “We want to get more infrastructure projects that are in the public interest built faster and built more cost-effectively,” said Steven.

Developing standards

Guggenheim’s view is that standards for verifying and measuring sustainability need to converge, much like how accounting standards converged in the EU. To get institutional money into Europe, when the EU formed they adopted one set of standards for accounting. “The same thing should eventually happen to unlock institutional capital for sustainable infrastructure projects in North America,” said Jim.

While it’s agreed that a set of standards is required, a key question is who should develop them? Does the responsibility lie within the industry or is it up to government to set the framework?

Industry has tried to develop standards, but the number of requirements keeps on multiplying. What the infrastructure market needs — whether it’s for rail, ports, or power — is a common standard for projects wherever they’re based.

Guggenheim has worked with Mott MacDonald on two reports covering ESG standards in infrastructure development. Our 2022 survey of the infrastructure development industry found three core conclusions related to ESG standards:

1. Current ESG standards and frameworks are not meeting the needs of infrastructure investors.
2. Stakeholders are interested in a standard set of metrics for reporting on ESG.
3. Pressure from investors and mandatory ESG disclosure requirements are identified as the primary mechanisms to improve integration of ESG into infrastructure investments.

Standards and metrics are often established at an organizational level and need to be tailored for specific infrastructure and project delivery models. The Canada Infrastructure Bank and Infrastructure Ontario have customized processes that embed ESG metrics into project decision-making.

“Given how long rail projects take,” said Steven, “we’ve got to be moving quickly on projects we have in our pipeline.” An example of this is the large number of investments already completed under the CIB’s building retrofit initiative. “We provide long-term, low-cost loans to public and private building owners seeking deep energy retrofits — going above and beyond what’s required by any building code – to decarbonize buildings across the country.”

Infrastructure Ontario doesn’t want to see too many regulations or requirements stifling innovation. However, they also don’t want scenarios where ESG becomes a certification or award race. “You don’t want it to just become a tick box,” Charl said. They’ve shifted their mindset to how they can get the best technical solutions that bring about the best benefits, even if it costs more.

The future of ESG

With the evolution that we’re seeing in ESG, there’s speculation on what needs to be implemented in rail financing projects in the years to come.

The Canada Infrastructure Bank is seeing two trends show up as they evaluate projects. First, during assessment, their advisors are increasingly taking a lifecycle view of each project’s carbon footprint. Second, they’re considering future climate risk. On a rail project, they’re now asking how many high heat days might be expected, and what effect does that have on usability? Or how do changes in the permafrost affect the maintenance of a rail line in Canada’s north?

“We need to rethink how we incentivize behaviors,” said Charl. He believes a mind shift is needed for at least the next few years to optimize ESG outcomes on future rail projects

Developing rail projects is a complex business. The integration of ESG standards into these projects should be an opportunity and not a liability; ensuring this is the case requires incorporating ESG principles and metrics at early-stage project planning. Slowly but surely, the infrastructure industry is moving beyond minimum standards to create transparent and measurable ESG project frameworks.

But we still have more work to do. As the cost and risk of climate disasters becomes more apparent, and as rail projects impact more stakeholders and communities, the push to transparently account for ESG metrics on major infrastructure projects grows. The Canadian rail sector continues to make progress with every major rail project, but only time will tell how today’s early-stage planning will result in positive outcomes for project owners, community members, and the surrounding environment.