Earlier this year, Morgan Stanley Wealth Management commissioned a team of graduate students from the Columbia University School of International and Public Affairs (SIPA) to conduct an evaluation of the environment for investing in infrastructure.
This is a extract from the summary of their findings published in “Custom Investment Outsourcing Strategy Committee Monthly” June 2014:
Challenge: Assessing the Full Values
“There are social and environmental benefits associated with improved infrastructure.”
As part of the research conducted by the SIPA team, we identified the universe of publicly available valuation tools to aid the infrastructure community in achieving the same level of standardization enjoyed by the broader impact investment community thanks to ESG metrics. After two rounds of screening and a deep dive analysis of the tools, we selected the Business Case Evaluator (BCE) and TREDIS® for recommendation as potential candidates to lead the standardization of valuation metrics and models based on their ability to perform financial analysis, cost-benefit analysis (CBA), and scenario or sensitivity analysis that would be consistent across infrastructure projects in the covered sectors.
BCE, the economic companion tool to the Institute for Sustainable Infrastructure’s Envision™ rating system for sustainable infrastructure and the TREDIS® suite stood out not only because of their greater ability to capture the full value and impact of an infrastructure project investment, but also because they are designed by commercial firms. Impact Infrastructure, LLC and EDR Group the designers of BCE and TREDIS®, respectively, have a financial incentive to maintain and further develop their
tools, as both firms offer subscription based extended versions of their free tools. Thus their commercial nature assures users that the tools use up-to-date assumptions as these firms vie to develop first-rate infrastructure valuation tools.
“The inability to consistently monetize indirect economic, social and environmental costs and benefits adds to the reluctance of key decision makers to approve more projects or invest in projects that have more uncertain financial prospects.”
Takeaways for Financial Advisors and Investors
Infrastructure as an asset class seems at least a few years away from such standardization envisioned in the previous section. Investors interested in taking advantage of the opportunities today should consider the following:
- Define a clear exposure strategy based on location of assets and stakeholders impacted by their investment.
- Consider whether a direct investment or a commitment to an infrastructure fund will best serve the overarching strategy.
- When choosing direct investments, insist on receiving a full business case from the project sponsor or fundraiser that includes descriptive and financial information, including risk valuation of financial, economic, social, and environmental costs and benefits.
- Consider the tools and methods used to create business cases; familiarity with tools such as the BCE and TREDIS® is helpful.
- When investing in infrastructure funds, investors should be aware of service providers, such as Preqin, that provide detailed information about fund managers, fund strategy, performance and track record.
By following these steps and asking the right questions, investors will be better informed and more readily able to justify any given investment beyond the financial risk/reward dynamic.
We recognize and thank the following members of the Columbia University School of International and Public Affairs team for their research assistance: Jordan Alloun, Tamara Hirsch, Annabelle Libeau, Chuan Lin, Andreas Maerki, Ramiro Pascual, Lee-on Pedahzur, and Jung Ryu.