Death of a soft topic

Box-tickers beware: ESG is on the verge of completing its journey from tree-hugging, impact-investing ‘nonsense’ to a bona fide investment requirement. As Anton Pil, managing partner, JPMorgan Global Alternatives, put it in a recent guest article: “ESG has become the dominant trend shaping the private infrastructure investment landscape.”

Much as we agree with Pil, it hasn’t escaped us that the box tickers have been able to find plenty of refuge in the ‘E’, while often ignoring/paying lip service to the ‘S’ and, to a lesser extent, the ‘G’. Considering the planet is going through an existential climate crisis, you might see the ‘E’, depending on how cynical you’re feeling, as the low-hanging fruit.

No more, though. Asset owners’ licence to operate – and by extension, their governance and corporate culture – are now very much under the spotlight, a social-governance revolution that has been sweeping the globe since the #MeToo movement forcefully emerged over the last year.

For infrastructure investors, managers of essential assets serving diverse communities, that licence to operate is a key part of their business. It’s that tricky subject we tackled in our recently published roundtable. High stakes too because, as Columbia Threadneedle’s Ingrid Edmund highlighted, get it wrong and “someone is going to take away your return in the next 20 years”.

And yet it’s still perplexing how many people in the industry give so little thought to these social-governance issues, casually dismissing them as ‘soft topics’ – especially when their consequences can be so severe.

Take the “negative advertisement [generated] in cases where companies have gone bust, notably due to high levels of debt”, as Ardian’s Marion Calcine warned in our roundtable. That “negative advertisement” can put pressure on entire sectors, and that’s the case even when highly indebted companies haven’t gone bust.

In the UK, for example, high levels of debt – and the impact it has on consumers – has contributed to a hardening of tone among the country’s utilities regulators. In a recent Financial Times article, Ofwat chairman Jonson Cox told water companies to prepare for “peak intrusion”, as he pushes them to be “more mindful of their social obligations”, keeping a lid on rising bills, excessive debt and leaks.

The ‘S’, of course, has long been the hardest nut to crack. JPMorgan’s Pil and Partners Group’s Esther Peiner, who also took part in our roundtable, both acknowledged how difficult it is to measure. To make matters worse, “social factors are deeply influenced by local context”, as Pil highlighted.

But the ‘S’ is crucial to engendering public trust, a volatile commodity these days whose importance the industry is, arguably, underestimating. As former CIA media analyst Martin Gurri – feted in some corners with predicting Brexit and the rise of Donald Trump with his 2014 book The Revolt of the Public and the Crisis of Authority in the New Millennium – explained in a recent interview:

“To function properly, industrial institutions need to have some proprietary control over the stories that get told about them. Once this control is lost, and a host of competing narratives about them arise, public trust inevitably starts to evaporate. This is what we see happening all around us. The effect has been a massive crisis of authority.”

Ultimately, LPs will be key to ensuring the industry is delivering on the whole ESG package. The signs are they are taking it very seriously. First Super chief executive Bill Watson cautioned asset owners recently on the perils of offering a substandard service. And the Chicago Teachers’ Pension Fund is showing its willingness to put its money where its mouth is with its $25 million mandate for a minority/women-owned infrastructure firm.

As Peiner put it in our roundtable: “In five to 10 years, we will see that certain assets will be easier to divest because they are ESG compliant, while others will sit on the shelf because no one will want them.” That will apply to firms too.