Is licence to operate the future of asset management?

With three of the world’s biggest LPs calling for sustainable investment, we discuss the thinking and operational commitment needed to be a responsible investor.

Elizabeth Warren, the senator from Massachusetts, has just dropped out of the race to become the next US Democratic presidential candidate.

The news will probably evoke a collective sigh of relief across private markets. Warren, after all, was out to defenestrate private equity, pushing for dramatic reforms, including additional caps on leverage and profits taxed as income rather than capital gains.

Even if the jury is still out on the impact her proposals will ultimately have, it’s fair to say she’s rattled the industry. Case in point: on Tuesday, sister publication Private Equity International wrote that KKR recognised anti-private equity sentiment as a risk factor worth noting in its regulatory filings this year.

Welcome to the club, private equity cousins. Infrastructure investors, after all, have long known about the reputational pitfalls that come with running essential, public-facing services. Which is what makes the just-published second edition of our Licence to Operate roundtable so refreshing – and essential reading.

In it, three well-known GPs discuss, in detail, the practical measures they take to ensure they are good corporate citizens. These include incentives, supply chain management, profit sharing, sensible tax policies and cutting carbon emissions.

Ardian, for example, ties part of the variable incentive of its portfolio company chief executives to ESG. NTR requires its tier one suppliers to sign up to the equivalent of the UN Sustainable Development Goals – and has not renewed contracts with suppliers that have failed to align. Antin Infrastructure Partners talks about re-thinking travel at the GP level and offsetting its emissions. This is just a small teaser.

The larger point is that licence to operate – the ‘S’ in ESG, if you will – is, arguably, where the cutting edge of asset management is at these days. That’s not to diminish the importance of ‘traditional’ asset management. Clearly, the ability to add value, mitigate risk and financially optimise investments will continue to be of paramount importance. Disaster-preparedness, as the current coronavirus epidemic is demonstrating, is equally key.

It’s just that a lot of what falls under traditional asset management comes across as arcane. Suitable for the pages of trade publications like ours, yes, but less likely to survive contact with the outside world. Or put differently, you won’t find ‘Make platform-building great again’ on a baseball cap anytime soon.

So, it doesn’t feel like we’re going out on a limb in saying that the firms that are able to speak fluently about licence to operate and demonstrate how they’re working to keep it are best-suited to navigate this brave new world we find ourselves living in.

Some of the world’s biggest LPs seem to think that too. Yesterday, Japan’s Government Pension Investment Fund, the US’s California State Teachers’ Retirement System and the UK’s USS Investment Management published a letter attacking “short-termism” in asset managers and companies.

“Companies that seek to maximise corporate revenue without considering their impacts on other stakeholders – including the environment, workers and communities – put their long-term growth at risk and are not attractive investment targets for us,” the pension funds wrote.

The reference to impact is particularly pertinent. Infrastructure investors tend to be aware that, as stewards of essential assets, they are managers of impactful investments. But there’s often an assumption that, by providing essential services – and often providing them more efficiently – positive impact is automatically generated.

Harsh as it may sound, that’s the low-hanging fruit. The true prize lies in the ability to run companies and assets that create better-paid jobs, visibly enhance their communities and are actively working to mitigate the worst impacts of climate change.

That kind of holistic, positive impact is surely the endgame of any successful ESG policy – and creating it very much the job of an active asset manager.

Is licence to operate the future of asset management, then? To be honest, we sincerely hope it’s already firmly entrenched in the present.

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