This article is sponsored by Meridiam Infrastructure
What are the key factors to consider when integrating environmental, social and governance criteria into your business processes?
You must first and foremost – the whole firm and all the teams – truly believe in ESG and include it fully in your investment process. It can’t just be a separate side process where people tick boxes, because that doesn’t provide any value, insight or risk management capacity.
You also want to ensure that the whole team is focused on ESG and impact, and has the expertise and know-how, as people are key. You need people with an initial pool of skills to deal with environmental or governance issues, especially when you have public consultation – that is all part of engaging with stakeholders. And people who really know how to deal with social issues. Getting a company on board, engaging with thousands of employees and delivering a strategic plan with them is a whole different ball game for most infrastructure firms.
ESG is something you deal with throughout the lives of your assets. You need a real methodological approach that covers the investment process, managing the assets and the services you provide.
So what does your ESG approach look like?
We see ESG and sustainability as the first layer of a minimum requirement. And, as a firm, we have grown from ESG to impact investment. So, when we deal with environmental issues or social issues, it goes beyond doing no harm. It is about thinking of the positive side of things and creating greater impact for the communities. For instance, what can I do in this investment to promote biodiversity? Can I engage in economic development initiatives around the assets that create additional social impact? When we deal with governance, it is about getting the best out of the stakeholder relationship.
And going beyond in governance means involving the stakeholders, such as employees and local representatives, in the governance of the asset. Over the past three years, we have worked on our own methodology to measure our impact and we started implementing it last year. So, we now have our ESG screening, as well as impact screening and tools to measure impact.
How does the methodology work?
The first step we took was to look closely at our business. That is why we became a B Corp or ‘mission company’ – to make impact as important as our financial returns, because ultimately we believe the two go hand in hand.
We defined five pillars, based on the UN Sustainable Development Goals framework, for the kind of impact we want to create. But these are also very much business-related impacts.
The first pillar, for example, is to develop more sustainable infrastructure and sustainable cities. The second is increasing access to clean energy. Our third pillar is climate, so we want our assets to be aligned with the Paris Agreement target of 2 degrees or lower. The fourth pillar is around inclusion and access to economic development. And the last pillar is about protecting and promoting biodiversity.
The methodology on carbon and temperature alignment we built and aligned with other industry players in Paris, including the Agence Française de Développement (French Development Agency) and consultant Carbone 4. The other impact measures are proprietary to Meridiam.
Our philosophy is not only to be committed to ESG and impact, but also to be committed to measuring it and delivering impact results on a par with financial returns. It is integrated into our delivery model and remuneration. Impact is also included in the carried interest, so everything is aligned from governance through to remuneration.
What are the challenges of building a methodology to capture measurements that have not been measured before?
We carried out a full strategic review of our investment activity because, in a way, impact is not something you measure from the outset; it is something that is relative to what is next to it. If you build a $4 billion airport in La Guardia, the relative impact in New York is lower than building a $200 million airport in Madagascar, which represents 2 percent of GDP and creates a huge number of jobs.
That is why the methodology needed to be very clearly thought through and also very focused on our three key sectors – mobility of people and goods, energy transition and social infrastructure. The methodology adapts to the particular needs of the sector, but the fundamental approach is the same.
The good thing with the UN framework for SDGs is that they have targets and criteria. But we also had to screen our own activities to see which SDGs were the most relevant to our impact goals.
Today, we have an online interface that allows us to collect data and feedback on our assets. And this allows us to build impact improvement plans, while also consolidating our reporting in line with our five pillars.
Why did you choose your Africa portfolio to test out your methodology?
Africa had the greatest diversity in terms of sectors – we had ports, airports, hydro, solar, social infrastructure, transport infrastructure. It was the most diverse and, from an impact point of view, it was perhaps also the most fulfilling exercise to do it in Africa. We tested the methodology back in 2018, got the results in 2019 and, since then, have deployed it on the rest of our portfolio.
Are there any particular investment themes to explore in emerging markets?
We like markets that have a government strategy for developing or achieving their sustainability goals and, since COP21, many governments have taken the time to set out strategies. Those strategies vary, so with the sectors we touch, we can respond to their priorities whatever they might be.
Some African countries have a focus on making renewables 40 percent of their energy mix. In Senegal, for example, we can provide half of that 40 percent over a four-year period, so it is great to be able to help meet that goal.
When we started in Turkey five or six years ago, there was a big focus on social infrastructure. We are now the leader in public-private partnerships to provide public hospitals. We have created more than 5,000 beds for a public health service that was almost non-existent when we started. So, rather than specific sectors, we are interested in those sectors that fit with the priorities of the countries in which we invest.
Are emerging markets a particularly good environment to achieve real impact?
It is a different risk environment. It is not easier, but it is more rewarding. We apply the same methodology everywhere, but in Europe and North America a number of things are already embedded in regulation.
For instance, with topics such as how you promote minority- or women-owned businesses, the developed world is often already addressing the issue through regulation. People do not think about it as impact, but you might have targets to create jobs in those enterprises in the US and Europe.
Africa is more of a virgin land in terms of rules and regulations, or incentives from the public sector. Creating jobs at minority- or women-owned businesses is something we would naturally do, although there is no framework and we have to do it ourselves. But when you create impact, you create goodwill and also reduce stakeholder risk on your asset. If you are providing essential public services, you will need some of that goodwill going forward.
Where you are seeing the best potential for impact and returns?
I do believe that we can create impact anywhere. But clearly, given the economic cycle, some emerging markets are very attractive in terms of our ability to help them achieve their economic goals as well as impact. We invest on four continents – North and South America, Africa and Europe (and thanks to our partnership with the European Bank for Reconstruction and Development, Europe stops in Kazakhstan for us) – and we are committed to all our regions. But if I were to advise somebody who was set on creating impact and achieving financial returns, it would be to invest in a subset of emerging markets.
Does the political structure of some emerging markets present any concerns from an ESG perspective?
You need a different approach to risk when you invest in emerging markets. When there is less democratic governance in a country, you should absolutely adopt an ESG approach because it is the only way to guarantee the involvement of the real stakeholders, and not just the government: when an infrastructure project is really essential, it is a much more robust investment case. It is essential to avoid the president’s white elephant dream, and the other factor is how you build your contractual relationships to deliver the service.
In emerging markets, we also insure our investments against political risk with institutions like the Multilateral Investment Guarantee Agency of the World Bank or the US government’s Development Finance Corporation. We take a systematic approach to de-risking the investments and the relationships we have in these jurisdictions.