This article is sponsored by Meridiam
Q: How do you ensure that sustainable investment principles are embedded in all your investment decision-making?
Matthieu Muzumdar: We see ESG and the United Nations Sustainable Development Goals as a core element of our investment strategy. It is not an afterthought. It is integral to our investment process. But it goes beyond as our sustainable investment philosophy is now enshrined in our by-laws. And our purpose, which is to deliver sustainable infrastructure that improves the quality of people’s lives, is even aligned with the SDGs. And because, at Meridiam, we actually develop infrastructure projects, that investment process can last for between 18 and 24 months. By the time we start deploying capital, we have already been shaping these projects for a long time, including the ESG and SDGs aspects. The investment committee meets four or five times over that period, to review progress. At each stage there is specific focus on sustainability, which of course becomes more nuanced as time goes by.
Q: To what extent do you focus on screening negative factors, versus creating positive impact? And how do the two interact?
Ginette Borduas: For us, ESG risk management and positive impact are the two sides of the same coin. New infrastructure is, by definition, complex, large and will be in use for decades, so there is bound to be some negative impact. We need to look at these risks and make sure they can be justified and managed properly, so that the social and environmental benefits that are generated will counterbalance the negative impact and produce an overall positive outcome.
Q: What do you consider to be best practice in terms of your internal resourcing in this area?
MM: Because sustainability has always been integral to our investment process, the investment directors leading projects have historically taken responsibility for environmental, social and governance issues. We felt it important that ESG wasn’t viewed as an external add-on but was fully integrated into the way we all work. Back in 2015, we decided that the United Nations Sustainable Development Goals had to be at the heart of all our projects alongside social and environmental impacts. It coincided with the adoption by all United Nations member states of the 2030 Agenda for Sustainable Development. We also took the view that we needed to have someone with full-time responsibility for sustainable investment practices, which is when Ginette joined the firm.
“To be effective, ESG has to be front of mind for those people actually negotiating construction contracts and discussing technical designs”
Ginette was able to bring added depth and breadth of expertise and the ability to implement and monitor delivery of our sustainability principles in a consistent way. It gave us an additional layer of oversight and control. I think having that combination is important. To be effective, ESG has to be front of mind for those people actually negotiating construction contracts and discussing technical designs, but at the same time there is a real value in having a dedicated resource.
Q: Do environmental concerns dominate or are social concerns an equal priority?
GB: For us, because of the nature of the projects we invest in, they have always been equally important. The infrastructure we build is, first and foremost, meant for the community. Sometimes there will be a strong environmental component, but the justification is always linked to community benefit and social acceptability.
We take great care to use a participatory approach on every project, engaging early with all stakeholders, including representatives from the population. Our strategy is to develop the project alongside them. That’s how you really ensure social acceptability. It isn’t something you can add on at the end of the process. It is something you build.
MM: Every project we work on will have specific initiatives around job creation, apprenticeships and the participation of small, local businesses, for example. For us it has never only been around environmental concerns.
Q: How important is measuring and reporting on sustainability? And what are the challenges?
GB: We have developed our own, tailor-made methodology based on the UN SDG framework. We have adapted that framework, to bring it in line with the Meridiam business model and the types of project that we are undertaking. The reason we have created a bespoke framework is that it can be challenging to find a methodology that allows you to monitor and report on different types of assets in different geographies. There is normally a checklist, or set of KPIs, but those can’t necessarily be adapted to specific circumstances and it can be difficult to tell the right story.
We also believe it is very important to benchmark, however, which we do using the PRI, for example. This helps us to see how we compare to a stringent framework and it is something we take very seriously. We compare favourably, but we will work very hard to improve every year. We work hard to improve the way we manage sustainability issues and the performance of our assets and ultimately, we work hard to improve our business model over time.
Q: Are LP attitudes towards sustainable practices changing?
MM: Globally speaking, we have certainly seen an increased focus and interest from LPs on the sustainability of assets, and I see that as a very positive shift. But many of our investors some of which have been supporting us for almost 15 years now were already opened and pioneers about this issue.
GB: Investors aren’t only interested in the financial outcome, certainly. They want to know what these assets will do for the community. They want to know what the positive impacts are. That is why it is so important to have the right framework, so that we can monitor and communicate the performance of each asset as it evolves.
Q: What do you see as the correlation between sustainable investment practice and returns in infrastructure? And how does the investor community view this issue?
MM: We believe that there is no trade-off between being more sustainable and generating better returns. We believe that by excelling in ESG, we actually reduce the volatility of our investments. It is one of the best risk mitigants that you can have. I know there is debate about this in the investor community, but over the years I think investors have increasingly embraced this view. I also think our track record goes some way towards proving it.
“The infrastructure we build is, first and foremost, meant for the community”
GB: We are very long-term investors, so taking into account ESG risk also means looking at climate change, and carbon transition. These things are incredibly important to us because no-one wants to get caught with a stranded asset. That’s why we select our projects very carefully, we make sure they are well justified and that in the long term they will be sustainable. Of course, resilience is also about adaptation. We will look for ways to adapt an asset if we need to. But a lot of the work we do is about trying to anticipate everything that could happen over time and then pick projects that will still make sense in the long term. That is what will bring value to the asset.
MM: You have to think about the investment profile that our LPs are looking for, as well. They are not looking to make huge returns but at huge risk. They are pension funds and insurance companies. They are looking for sustainable returns over the long-term. That is consistent with having a sustainable investment practice.
Q: What are the biggest challenges for the infrastructure industry in terms of achieving sustainability?
GB: One of the biggest challenges we face now is actually agreeing on what needs to be done. Everyone says they see ESG and SDGs as important. But just how far do you go with that and what does it actually mean to deliver positive impact? How should you incorporate sustainability into everyday business? Do we need standardisation or do tailor-made approaches make more sense? These questions are really important, but it is difficult to get everyone on the same page. Another challenge is driving sufficient investor appetite for smaller, more complex projects. Big projects always attract a lot of attention, but if you look at the critical infrastructure being built in Africa and other emerging markets – waste management projects, potable water projects – these can be challenging and are often quite small. We need to find ways of bundling these together, because it is these projects that have the potential to deliver the greatest positive impact.
Then there is the question of what you do with stranded assets. Are they transformable? We are always conscious of these challenges because of the nature of the projects we are investing in. But a lot of infrastructure won’t have a long-term plan in place. This infrastructure will need to be transitioned or replaced and the question of how that will be financed is something that is still being discussed. I know it sounds as if I am presenting more problems than solutions, but that is why Meridiam is always looking to the future and trying to anticipate what challenges, but just importantly opportunities, will come next.
MM: Finding solutions to these problems is what we are all about, after all. We have developed a number of clean energy projects across Africa for example, in the solar and geothermal space, meeting the demand for power there in a sustainable way. We also have a fund dedicated to energy transition, where investments include Allego which is developing charging infrastructure for the further deployment of electric vehicles throughout Europe. The pension funds and insurance companies that make up our investor base are committed to improving the sustainability of infrastructure and these are just some of the ways we are working with them to do that.
Integrating sustainable investment practice
Sustainable investment practice is integral to Meridiam’s investment philosophy
“In a nutshell, what we have done is build, and now operate, solar plants which are bringing significant power capacity to the country at affordable prices for the utility and therefore for local users, at the same time creating significant secondary benefits for the local community,” says the firm’s Matthieu Muzumdar. When developing a hydro-powered plant in Gabon, meanwhile, Meridiam took the unusual decision to downsize the project by almost half when the extent of potential biodiversity challenges were uncovered in the development phase. “We decided to downsize to reduce the impact on the natural environment,” says Ginette Borduas. “We take the same approach evaluating impact on communities as well. This is the advantage that we have in developing projects from the outset. We can take our time to investigate everything thoroughly to the point where we are comfortable that the positive will outweigh the negative. This is our business model. We won’t ever do it any other way. All of our projects have to go through this rigorous process in order to become a reality.”