As many of the UK’s water companies weigh up the aggregate £150 million ($170 million; €173 million) fines they now face in 2023 and 2024 for failing to meet targets around water supply interruptions, pollution incidents and internal sewer flooding, customers and local communities will be asking when more will be done to bring these private utilities into line. For it is far from the first time this has happened. Last year, one company alone faced a £90 million fine for discharging raw sewage illegally into protected seas, damaging – according to the judge passing down the penalty – the environment, public health and the livelihoods of local fishery employees.

An event such as this demonstrates the need for infrastructure investors to carefully consider their social licence to operate. Especially when we take into account the rapidly growing concept of a ‘just transition’ to renewable energy that seeks to ensure the benefits of decarbonising economies are shared widely. And in areas where infrastructure projects are planned or in operation, local communities are increasingly mobilised to hold operators to account for their actions.

This social licence, according to Scott Lawrence, head of infrastructure at CPP Investments, is about “carrying the right to operate a piece of infrastructure on behalf of users and stakeholders by operating in a fair and legitimate way”.

A question of ‘balance’

The concept of fairness is particularly important in infrastructure, given that assets are usually providing a public good or necessity. “Infrastructure is in many ways different from investing in other sectors,” says Lawrence. “It involves the operation of often essential services in a monopolistic environment where it is possible to exploit users no matter the cost. This used to mean that operators and developers could be insular and just focus on a piece of kit. That’s no longer the case as expectations have rightfully increased. Social licence underpins the concept of balance, in which investors should curb maximising economic rent to think about long-term sustainability.”

The scale and location of infrastructure assets are also factors here. “These are often large, sprawling assets,” says Shami Nissan, partner, sustainability at Actis. “They often nestle alongside peri-urban or rural communities and you need to establish goodwill and trust with local people in a way that goes beyond ensuring business continuity and remedying negative impacts.”

Beyond fines, the risks of failure to act fairly are significant. As Lawrence outlines: “If you don’t do this right, you are tempting communities and governments to take assets back – they will cancel concessions or nationalise assets. And, if there are too many bad actors in infrastructure, governments will be far less inclined to privatise because of the potential for negative impacts on the service.”

Either that, or developers or operators face the prospect of civil unrest that can lead to projects being cancelled, assets being damaged, or an inability to attract finance or arrange insurance. Investors therefore increasingly need to pay attention beyond simply adhering to legal and concessionary requirements. “Social media and a more activist society mean that aggrieved local communities can make their voices heard quickly,” says Nissan. “Small problems can quickly escalate.”

Nissan adds that infrastructure investors and operators still have some way to go. “Social licence is talked about more these days,” she explains. “But I’d argue that it’s not discussed enough, and that talk is not the same as action. There is a better understanding of it as firms seek to improve their sustainability credentials and – in some cases – seek Article 9 status. However, some companies rest on their laurels because they are in inherently impactful sectors. More in the industry need to adopt a systematic approach.”

Being more systematic can also bring benefits to investors over and above risk mitigation, says Esther Peiner, managing director and co-head of private infrastructure Europe at Partners Group. “Social licence to operate goes far beyond solid reputation management,” she says. “It encompasses fiduciary duty, risk management, ESG obligations, and investment strategy and processes. And if you approach it with just a compliance mindset, you are missing benefits through value creation and differentiation.”

The local touch

“Social licence underpins the concept of balance, in which investors should curb maximising economic rent to think about long-term sustainability”

Scott Lawrence
CPP Investments

Yet approaches also need to be aligned with the needs of society and communities on the ground – successful initiatives tend to be tailored to local conditions, issues and problems, and these can vary markedly. “If you are really looking to be an investor in an asset over the long term, you need to be a member of the community long term,” says Jordi Francesch, head of asset management at Glennmont Partners. “You need to contribute to, and support, local communities. Otherwise, you are just an investment fund based in London or wherever.” That means ensuring, for example, that local workers are employed, where possible, and it could also mean funding roads or museums.

Partners Group also says that a targeted approach works best for local communities. “At an Australian windfarm, we created a resident ownership scheme so that local people could benefit from the project’s profitability,” explains Peiner. “In a European project, we found the focus of concern was less around individuals and more around biodiversity when using formerly agricultural land, so we developed biodiversity zones. That’s good business practice because it minimises the risk of significant opposition, but it is also fair.”

All this means working in partnership with local regulators and authorities, as well as with communities themselves to create what Nissan calls a “bottom-up” approach to creating programmes that meet specific needs and, importantly, to addressing local concerns. In addition to having a community investment plan and, in many cases, community-disbursed funds, Actis also ensures there is a community liaison officer on the ground. “They are on the front line and act as the canary in the mine if there is an issue,” says Nissan. “The cost to head office is marginal, but this really helps build trust with local communities – they know you have their back.”

Infrastructure investments and assets have always needed a social licence to operate sustainably, but this is clearly a developing field and there will be much more to come as needs change and innovations emerge. Lawrence points to asset integrity as a key area for focus today as climate change increases risk. “There are increasing debates about burying electricity transmission lines, for example,” he says. “That’s more costly, but it both protects lines from climate events and can address community issues.”

Lawrence also says technology can play a much larger role here. “First and foremost, our responsibility is to keep assets up and running and protect the safety of stakeholders – when a bridge collapses, it’s devastating on many levels. We need to leverage technologies such as lidar [light detection and ranging] and drones much more to measure minute movements in roads, bridges and tunnels and to manage vegetation.”

More pressing today, however, is affordability. “This is vital in today’s economic climate,” says Lawrence. “We need to find ways of providing value for money so that essential services are maintained.”

That, he adds, may mean making trade-offs, and it in any case requires investors to act before issues arise. “It’s incumbent on asset operators to understand that expectations have increased, to leverage creativity and to engage with communities to prevent problems before they occur.”