More and more allocators want their capital to actively help pull the planet back from the brink and improve the lives of the vulnerable and disadvantaged. For this growing cohort, investing with impact is no longer a choice, but a necessity.
The industry experts that have shared their insights in this report are, of course, strong proponents of impact investing, but they are also quick to address the challenges faced by a movement that has yet to truly find its footing in the infrastructure space. After all, in an asset class where ticket sizes are considerable and investment horizons long, impact investing asks a lot of its investors. But it’s also clear from this report that the appetite is certainly there – and it’s growing.
To facilitate infrastructure impact on a grander scale, and to ensure that returns are optimised, investors need a robust framework for measuring and monitoring performance, along with a standardised reporting language and wider recognition that impact and infrastructure are a natural fit.
Beware of impact washing
Unlike ESG, identifying true impact investing boils down to one key word: intent. If there is no clear, positive environmental or social outcome for investment, then it is not impact. Many impact investors use the UN Sustainable Development Goals to make sure their objectives are aligned to a recognised framework and to tailor a fund’s desired impact to a clear outcome.
“By having clear criteria to track our progress against, including infrastructure explicitly referenced in three of the UN’s SDGs and underpinned in many others, managers and investors are encouraged to make more deliberate and conscious investment decisions in support of these goals,” says Mary Nicholson, head of responsible investment for Macquarie Asset Management.
Classifying that intentionality is only part of the problem, however. A 2020 survey by the Global Impact Investing Network outlines the key challenges facing the market in the next five years – and there is a clear winner. Among respondents to the 2020 Annual Impact Investor Survey, 66 percent said ‘impact washing’ was their greatest concern.
With impact, it is not just about sorting the truth from the lies – which is challenging enough, as we’ve seen with ESG ‘greenwashing’. The added layer of complexity here is that measures of positive impact are highly subjective – what metrics might we use to gauge how a new public transport network has improved someone’s quality of life, for example?
What’s more, even once a measurement has been agreed and standardised, the level of positive impact may vary greatly depending on where you are in the world. If a new wind farm is built in Western Europe, for example, it might generate the same energy capacity as if it were built in Africa, but would it produce the same level of social impact?
Performance therefore has to be assessed across a range of dimensions, and carefully monitored as such. “It’s important to recognise that the term ‘impact’ is currently being applied more widely than has traditionally been the case,” says Nicholson. “It’s therefore critical our sector adopts robust frameworks to assess, measure and transparently report on the impact our investments are making.”
Picking up the gauntlet
There is no doubt the environmental imperative to invest with impact in infrastructure assets is paramount – and urgent. Data from MSCI shows that listed infrastructure equities emit 380 tonnes of C02 per $1 million dollars invested, compared with only 90 tonnes for the equivalent amount invested in all global equities.
Pressure on investment managers to rise to the challenge is intensifying. Schroders’ Global Investor Study 2021 asked respondents who they thought was most responsible for mitigating climate change. The largest proportion – 74 percent – said the ball was in the court of national government and regulators. But, there has been a shift in sentiment towards holding investment managers accountable: 53 percent said investment managers/major shareholders were responsible for mitigating climate change, up from 46 percent in 2020’s study.
Perhaps the declarations made at the COP26 conference in Glasgow last November had a part to play in this. Industry coalitions were formed and net-zero pledges proliferated from climate partnerships. There was a strong sense that, as governments around the globe had repeatedly failed to meet their targets, the eyes of the world had turned to the private sector to unlock resources and lead the march to net zero.
A key pillar of the summit was the need to finance climate-resilient infrastructure in emerging markets, where communities are disproportionately affected by the risks of a rise in global temperature. Indeed, the World Bank estimates that if left unchecked, climate change will push 132 million people into poverty over the next 10 years. In low- and middle-income countries, damage to power and transport infrastructure from natural disasters costs around $18 billion each year.
Although impact investing in emerging markets faces its own set of macroeconomic headwinds, the size of the opportunity and scale of the need is undeniable. Not to mention the potential for infrastructure funding in developing regions to dramatically improve the lives of millions of people in ways unrelated to climate.
Boosting social outcomes
Take transport infrastructure, for example. Studies show that improving transport infrastructure can have a significant impact on quality of life. But prioritising road investments arguably risks more exclusion than inclusion – after all, better highways benefit those who have their own cars and can afford to use them.
With public transit facilities primarily used by low-income households, investment in public transport infrastructure can have a direct positive impact on underserved communities – environmental benefits aside. For the transport-disadvantaged, developments and innovations can improve access to education and healthcare; promote the inclusion of women, children and the elderly in society; and open up considerably more economic opportunities.
With all the focus directed toward the climate emergency, there is a huge opportunity to boost social outcomes through advancements in education, digital and healthcare infrastructure also.
“The pandemic has shown that social infrastructure is more important than ever to help provide health solutions, education facilities and centres for communities to come together and access local services,” says Thierry Déau, founding partner and chief executive at Meridiam, which invests in a wide range of social infrastructure assets across the globe.
After all, social outcomes have a natural home in infrastructure. Looking at ESG scores by each of the three components, companies investing in infrastructure have consistently outperformed companies investing in all sectors, but scored highest of all on social factors, according to the GI Hub’s Infrastructure Monitor 2021.
In impact investing, social outcomes are no longer just an ethically convenient side effect of asset construction or decarbonisation. For many investors, social benefits are just as important as reducing climate footprints. “It is critical that we focus on the community within which we work and look to use our presence as an opportunity to address the social needs which are most prevalent,” says Déau.
Among respondents to the GIIN’s 2020 Annual Impact Investor Survey, only 6 percent were targeting solely environmental objectives with their investments; 60 percent invested for both social and environmental outcomes. As this report will explore, such an approach seems to be the sweet spot for infrastructure impact, too.
A bright future
Issues around impact accountability, dilution of impact with other sectors and regulatory and political barriers continue to subvert efforts to channel capital through to where it is needed most. But try we must. As more specialised infrastructure impact offerings come to market – backed by the talent to match – setting goals for non-financial impact and aligning those with financial return should become easier, not harder.