Over the last four years, Meridiam and ENEA Consulting have collaborated on two fronts: identifying and de-risking new investment opportunities in the low-carbon transition field; and designing a unique ‘impact’ framework for Meridiam that supports its investment thesis in sustainable infrastructure. We believe infrastructure is a sustainability and resilience enabler, and that the two represent interconnected long-term value for the entire stakeholder spectrum.
In April, Meridiam presented investors with an annual impact report of activities across all the firm’s investment funds against a framework of environmental, social and governance and UN Sustainable Development Goals targets and performance indicators. This involved the use of a proprietary, purpose-built impact evaluation system that we believe is unique in our field.
Developing and investing in high impact infrastructure globally is one of the main challenges of the coming decades and a condition for a long-term sustainable future. It is necessary and possible to act now – and the market is ready for it – to provide an immediate but sustainable response to the current sanitary and economic crisis.
“After having designed a very sophisticated accounting and financial system, we now need to develop a robust accounting system for environmental and social aspects for unlisted assets”
Infrastructure should be considered and designed as an enabler of sustainable activities. As such, it is a priority to design a low-carbon and inclusive economy, as this allows most of the physical flows that support the ‘real’ economy. That includes information being transmitted through data centres and fibre networks; mobility through public transport, roads, airports and highways; and international trade relying on harbours and global logistics.
Infrastructure also encompasses social infrastructure, which forms part of any country’s ability to provide sustainable public services to its population in relation to health, education and access to a fair justice system. Such elements are fundamental to addressing public expectations.
Dealing with infrastructure is also a long-term play. Infrastructure projects are long-term assets and tend to lock in our choices for 50-plus years in many cases. We need to fully integrate long-term sustainability targets into infrastructure planning and development, and it must be done systematically in all new projects.
To encourage a more sustainable economy, we will need huge amounts of capital deployed into new infrastructure and the revamping of existing infrastructure. According to the OECD, some $6.9 trillion will need to be invested every year until 2030 to meet the Paris Agreement targets. As these new investment needs are, by design, aligned with a long-term sustainability agenda, they represent promising opportunities, assuming they can deliver attractive risk-adjusted returns.
Beyond traditional practices
We believe sustainable considerations and risk management have a lot in common when it comes to infrastructure investing. Properly designing and assessing projects to meet sustainability goals means thinking far beyond current ESG practices and obligations and anticipating the full spectrum of long-term risks and opportunities. It is thus critical to consider, throughout their life cycle, both the impact that environmental and social changes can have on assets, as well as the impact generated by these assets on the environment and societies.
As such, sustainability matters become extremely strategic for investors as they determine the long-term value of these assets.
For example, facing water shortages on power plants, as already happens to Indian utilities, designing mobility infrastructure that is not adapted to future uses, or failing to anticipate carbon value when structuring an airport investment will very likely affect long-term and total returns. This goes beyond the well-known concept of carbon-intensive stranded assets. In fact, even green assets can become stranded if they do not address adaptation considerations.
Societal, market and technological shifts now offer a plethora of unprecedented opportunities for asset managers to achieve attractive returns, deploy investments and deliver higher impacts. Citizens are demanding more action; new technologies and innovative business models are stepping up; and we are seeing a strong evolution of financial regulatory frameworks and initiatives from the finance industry.
This push has led to the evolution of new frameworks to incorporate the social, economic and environmental dimensions of our changing society. The UN, through the SDGs, provides an international tool that embraces the full spectrum of such impacts. The European taxonomy is designed to include a more stringent integration of environmental and social aspects of business activities and investments called ‘sustainable’, although technical criteria mainly focus on greenhouse gases.
Large asset owners’ recent commitments to re-allocate capital to sustainable activities – for example, GPIF, NZ Superfund and the UN-convened Net-Zero Asset Owner Alliance, which represent nearly $4 trillion – are creating a large demand for sustainable assets.
Getting the right data
Collectively, we need to make sure that these developments are moving in the right direction from an environmental and social standpoint. This means having the adequate tools to measure and monitor impact.
“Infrastructure investing and sustainability are now inextricably linked”
On this front, the measurement of impact also showed recent progress thanks to new frameworks, tools and data allowing corporate and financial players to better understand risks and opportunities. Although imperfect, there is a growing amount of higher quality data available. This is either generated by companies (meters, geolocation technologies, artificial intelligence, and apps providing real-time or visualisation tools), regulation (mandatory and homogenised reporting) and better scientific approaches to anticipate and fully evaluate impacts (global and sectoral climate scenarios, lifecycle analysis, and carbon and water footprints).
We believe this is just the beginning of a major evolution. After having designed a very sophisticated accounting and financial system, we now need to develop a robust accounting system for environmental and social aspects for unlisted assets, starting with infrastructure. It is complex, but innovation will keep accelerating as stakeholders are now truly looking for it.
Here are some best practices we can share after a few years of intense research, collaboration and implementation efforts to integrate impact in a concrete and ambitious way into Meridiam’s activities:
- Consider a holistic framework to cover all type of impacts and avoid shortcuts; be more granular on what is the most important (concept of materiality)
- Do not remain at the surface as the devil is often in the detail and outcomes may be counterintuitive; being granular and project-specific on what truly matters (for example looking at behaviours, supply chain, externalities) is essential
- Contextualise impacts depending on the type of geographies you invest in; this is complex but mandatory
- Develop relevant and detailed KPIs at the asset level
- Set objectives and benchmark yourself
- Design an ‘impact roadmap’ to achieve these objectives and implement it
- Adapt methodologies, tools and procedures to manage impact throughout the life of the fund
- Make performance assessment and reporting tools user-friendly and visual – which does not mean ‘simple’ nor ‘fully standardised’ – for all your stakeholders
- On-board stakeholders and make it part of your value proposition to align interests
Be transparent and ready to be challenged
- Once you have integrated impact at the right level, you can explore further synergies with your financial and investment strategy.
Of course, the above takes time and it requires top management support, energy, effort and money to design such a strategy and implement it properly. However, we believe players involved in infrastructure investing should consider it a core business methodology, not a ‘nice to have’. This is because infrastructure investing and sustainability are now inextricably linked.
With much momentum and progress to date there is inevitably more work ahead. Below are some considerations to keep things moving forward:
- Push for the development of ambitious and robust methodologies and impact strategies, even if this represents an immediate investment
- Challenge, complete and improve existing data to measure, contextualise and benchmark impacts
- Development of innovative financial mechanisms would help to align the interests of stakeholders and share the delta of value created or add value to strategies aimed at optimising long-term environmental and social impacts
- Accelerate research on the correlations between impact and ‘risk/return’, knowing that this can only be done once robust impact methodologies have been designed and implemented
- Train all stakeholders on impact.
Although much effort will be needed over time, we are convinced, based on our practitioners’ experience, that new approaches and standards can be implemented to assess and monitor the positive impacts of infrastructure that go beyond current practices.
This is a demanding path, but we believe this journey will help our industrial community to frame more resilient investments to the benefit of all. Our belief in this approach runs deep, and our capacity to translate this from vision to implementation bears witness to our level of commitment.
Our hope is that this path will lead to a sector-wide transformation, with ESG-SDG impact assessment becoming a mainstream requirement for all infrastructure investment.