Meridiam: High impact investment

This article is sponsored by Meridiam

What are the big global challenges that underline the importance of an infrastructure impact strategy?

The multiple crises we have lived through in recent years, starting with the global financial crisis, then covid, and now war in Ukraine and widespread supply chain disruption, have all impacted people’s lives acutely. That has meant that impact investment designed to provide solutions ranging from the affordability of basic services such as energy and water, which have become rare and expensive commodities, through to social services and even logistics, has become incredibly important. Impact investment is a way to focus on outcomes beyond financial returns, and those outcomes are critical to creating resilient societies.

Infrastructure, as an asset class, is inherently impactful. Why is it not enough to simply invest in sustainable infrastructure as most infrastructure investors would claim to do?

If you look at the philosophy behind the EU Taxonomy, which is what many infrastructure investors use to define sustainability today, the emphasis is on doing no significant harm. With impact, we are looking to go way beyond that, and actually trying to drive real benefit in terms of environmental and social goals.

Of course, we need to be sustainable from the perspective of the physical assets. But infrastructure has such an array of stakeholders – including, most importantly, the public – that the potential for meaningful positive impact is immense. Having intentionality around that desire to deliver positive impact goes well beyond the realms of sustainability.

Which specific areas of impact are you focusing on and why have you taken that decision?

There are five major pillars to our impact strategy. Clearly, one of those is climate – there is nothing original about that. The next two are also intrinsically linked to infrastructure, in terms of the development of sustainable cities and economies and access to affordable and clean energy. Where we have chosen to go a little bit further is with the inclusion of biodiversity and social and economic inclusion. Those last two pillars are extremely important to us and represent a critical component of our impact strategy.

How are climate-related goals and social goals linked, and how can this intersection of global challenges be addressed through infrastructure investment?

Climate and social impact investment are certainly interrelated. Climate change has triggered risks that we must manage, but it is also creating investment opportunity as the world transitions to a more sustainable future. That transition is taking place not only from an energy perspective, but also through the building of more resilient infrastructure, cities and ecosystems that are designed to protect people from the effects of climate change.

We have all seen the increased prevalence of droughts, for example, and other acute climatic events, which typically impact less advantaged communities the most. By investing in more resilient infrastructure, we can help society adapt to mitigate climate change risks.

Where are you seeing impact investment opportunities in the education space, in particular?

We are living in an era where the potential growth and wellbeing of economies and societies is very closely linked to education at all levels. No one has cracked the code in terms of the best way to provide access to education, including the ability to keep training throughout an individual’s working life, and so this is an area that we have been focusing heavily on.

We have made numerous investments from primary schools right through to higher education, looking to develop both a physical and non-physical infrastructure around education that promotes a whole host of sustainable development goals. Indeed, one of the projects of which we are particularly proud is the design, build, financing and maintenance of five schools and three daycare centres serving over 4,000 pupils in Espoo, Finland.
The project marked the first social PPP in the country and is part of Espoo’s investment programme called Schools in Shape, designed to enhance learning environments by providing safe and healthy spaces for students and staff.

Meridiam has also been selected to set up the Welsh Education Partnership to efficiently plan, design, procure, build, finance and maintain schools and other community-based facilities in Wales. The Welsh government seeks to improve educational standards in the country, and to ensure that all new school buildings target net-zero carbon. These are just two of many investments we have made in the education space.

And what about digital infrastructure? What opportunities do you see to create positive impact there?

Digital inclusion is an important investment theme for us, and one that we have been active in across Germany and Austria in Europe, as well as the US and Canada, bringing connectivity to rural and economically deprived areas. We have seen a lot of regulatory support in this area on an EU level, as well as from member states. The US also has a federal plan to support digital inclusion. This regulatory support reflects a recognition that digital inclusion has a direct impact on people’s lives and their economic empowerment.

What is your approach to measuring impact and what are the challenges that this sometimes involves?

We have built our own set of methodologies over the years. On the climate side, for example, we have a tool we developed alongside other players in the marketplace, and which is shared with French development agency AFD. That allows us to measure the temperature of our portfolio.

Other types of impact can be more difficult to measure and so we have developed a proprietary tool called Simpl., based on the UN SDGs and which we use to quantify the impact of every single asset that we own.

The SDGs that we use reflect the five pillars of our impact strategy. They are sustainable cities and infrastructure, which speak to SDGs 9 and 11. There is access to clean energy – SDG 7. We have a pillar focused on inclusion, which measures against gender equality, for example, and also looks at access to decent jobs – that encompasses SDG 8 and others. The last pillar is based around biodiversity – SDG 15. We set targets for ourselves and measure our progress against those targets on a yearly basis.

In terms of the challenges, in order to be accurate in measuring the impact that we make, it is important to have a benchmark in place. That is because impact is relative depending on where it is created. The example I always like to give is a 40MW solar plant in
Senegal, which would be significantly more impactful than a 40MW solar plant in France. In France, it would represent a drop in the ocean, but in Senegal, which has 1.4GW of total installed capacity, it could be transformative. The challenge, therefore, when it comes to any new type of infrastructure, is to ensure that you have an appropriate benchmark to be able to quantify the impact that you are having on a specific environment or community.

Has the EU’s SFDR regulation helped bring some clarity around what impact really is?

Yes, I think so. Any fund that wants to qualify as Article 9 needs to be very clear about what impact they are looking to create and how that is integrated in their investment strategy. That certainly makes it easier for LPs when it comes to their investment decision-making. The regulation is helping to alleviate concerns around impact washing.

How do you expect impact to evolve within the context of infrastructure moving forward?

I believe that infrastructure can and should lead the impact movement. Of course, infrastructure is, by definition, impactful, because it deals with the delivery of essential services, encompassing everything from clean energy and energy transition assets, which can support a more sustainable natural environment, to social assets such as the provision of hospitals and schools.

However, we need to move beyond the notion that, because infrastructure investment is already inherently impactful, we have already done enough. Instead, I believe we must push further, and intentionally and rigorously pursue positive environmental and social outcomes through our investment and asset management.

How would you describe investor attitudes towards impact investing, and are they changing?

We have seen a significant increase in investor interest in impact, largely driven by the momentum that has built up globally around tackling climate change, as well as fallout from the pandemic, which has triggered policymakers and regulators to increase their focus on the social challenges that the world faces.

When we first talk to investors that are unfamiliar with the space, however, we typically experience some scepticism until they realise that we are not sacrificing any financial performance for the positive impact we are making. US pension funds, in particular, are very vocal about the fact that their fiduciary duty is to make money for their pensioners. In return, we are very clear that we would not expect anything less. We are not asking them to trade returns for impact – that is extremely important. There is no kind of compromise involved when you are investing over the long term.

Unfortunately, impact investing is still often associated with charities and foundations. That is not what we do, at all. We simply have clear and stated non-financial goals, which we measure and report on, alongside our financial objectives.