Meridiam: No compromise in impact investing

There is no trade-off between financial and non-financial returns in impact investing, says Meridiam founding partner and chief executive Thierry Déau.

This article is sponsored by Meridiam

Thierry Déau

How have you seen investor attitudes towards impact evolve, and what is driving that?

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. Investors are looking for solutions as a result.

Why is infrastructure a good fit for impact investment?

Infrastructure is, by definition, impactful because it deals with the delivery of essential services. Infrastructure encompasses clean energy assets, transition assets and transport, which can be both impactful in terms of economic growth, environmental preservation and social inclusion. On the social side, meanwhile, infrastructure is more important than ever to help provide health solutions or education facilities, where impact at large is strong.

Is there now a universal definition of impact, or is there still more work to be done on standardisation?

We recently spent nearly a year with the Paris-based initiative Finance for Tomorrow, gathering the whole marketplace to try and figure out a unified definition of impact. Historically, everyone has focused on different sectors and different forms of impact, and they have all defined that impact in very different ways, so it is an important challenge to address.

I would say that we are almost there in agreeing that definition. But most importantly, a lot of it is about setting goals and mobilising resources to reach those goals. That intentionality is critical.

What roles have the SDGs played in shaping impact investment?

The SDG framework has been really important in helping shape a universal classification system for impact. The UN SDGs offer a comprehensive framework that is reliable. The fact that no one has challenged that framework shows just how important it is.

The 17 mid-term goals that the UN established as part of the Paris Agreement on climate cover pretty much every possible avenue for impact investment and define what being impactful actually involves. Those SDGs range from justice and peace to sustainable infrastructure. In fact, one of the reasons why infrastructure can be so impactful is that it has its own SDG focused on building sustainable cities and providing access to clean energy, for example.

What about some of the more recent European regulation? How has that affected impact investment?

There is a tidal wave of regulation on the way. The EU has initially focused on climate, but the field of influence is set to widen as we await the social taxonomy as well. But I would say that all this regulation reinforces what the UN SDGs already represent. It is moving in the same direction, although perhaps providing additional tools in terms of assessment and measurement.

What tools and methodologies are necessary to help make impact investment a reality?

We spent a number of years building our own set of methodologies. On the climate side, we have a tool that allows us to measure the temperature of our portfolio. That tool was developed alongside other players in the marketplace and is shared with French development agency AFD, as well as other asset managers. Other types of impact, outside of climate, can be more challenging to measure and so we had to build our own tool, called Simpl., which benchmarks every asset in our portfolio against the UN SDGs.

Of course, it isn’t advisable to cover every SDG. At Meridiam, we have defined five pillars of impact, for which we bring concrete solutions and have true contributions.

The first is climate, where we use the collaborative tool. With the other four, we use our own methodology. There 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.

For each of these pillars, we evaluate how impactful the project is within its specific location. That generates a score on a scale of one to five. We then set three-year goals for each of those pillars and try to reach those goals by having an actionable implementation plan for every asset we own.

How is that impact being achieved in practice?

To give you one example, five years ago we set up an energy transition fund, which has met our impact objectives because it is aligned to the 1.5C strategy outlined in the Paris Agreement. The fund includes assets such as Allego, the leading European public EV charging network, which aims to deploy more than 300 ultra-fast EV charging stations across the EU. The fund also includes hydrogen projects or biogas production facilities, for example. It’s all about CO2 avoidance.

Then, if you look at some of our flagship projects in Africa, their impact goes well beyond the reduction of CO2 emissions. Take our large solar platform in Senegal, for example. With 140MW of capacity, it is delivering around 60 percent of the solar capacity of the country and 15 percent of the country’s energy capacity as a whole.

Created from nothing, it’s obviously hugely impactful from the perspective of SDG 7, but its impact goes well beyond due to the community projects we have developed around those power plants. For instance, we are working alongside a specialist NGO to provide women with access to entrepreneurship skills through training, as well as a microfinance fund that has helped more than 1,000 women set up micro-enterprises over the past three or four years.

We also own a 46MW biomass plant in Côte d’Ivoire, the largest of its kind in Western Africa, known as BIOVEA Energie. This business is creating a positive impact by providing clean energy to a community of 1.7 million people, all powered by agricultural waste.

But again, what really excites us here is the social dimension of the project. This is a facility that allows 12,000 smaller planters, in a 60km radius, to recycle the residues of palm leaves from the local crop. In selling that waste, these planters have increased their income by 20 percent, improving living conditions in a region that was previously struggling. In addition, around 5,000 new jobs will be created.

These are some of the ways in which we seek to create impact, focusing on the financial return, but at the same time and with the same level of focus, ensuring we are delivering a social or environmental return.

How do you balance those financial and non-financial returns?

When it comes to social and biodiversity impact, those non-financial returns are in our minds a must-have in terms of sustainable infrastructure. There is no arbitrage – you need both. It does require investment to create that impact, but we see it as investment with a positive return.

When it comes to carbon, meanwhile, we actually measure the cost using long-term pricing curves. It is very clear that you could lose up to 10 to 15 percent of the value of an investment if you were to be taxed on those carbon emissions. It then becomes imperative to take action because that carbon equates to real money.

How do you report on the impact that you make, and why is that important?

It is extremely important for us because we have transformed ourselves into a French B Corp – a benefit corporation. That means we have financial and non-financial performance set in our bylaws. It is not, as I said, a question of arbitrage. We have clearly defined goals set in both areas and so we have to report on our progress against those goals to all stakeholders.

In order to do so, we have what we call a mission committee – an independent committee made up of management and independent experts who monitor whether or not we are delivering what we say we are delivering. Transparency is critical to our impact strategy and we publish our impact report every year, around the time of our annual meeting for investors.

What do you think the future holds when it comes to impact investment in the context of this asset class?

I think people finally recognise that there is no contradiction between financial results and impact results. On the contrary, I am convinced they are very closely linked. And indeed, today, we don’t have a choice. We have to achieve both. Take the fossil fuel industry as an extreme example. It is only a matter of time before those become stranded assets.

An impact investment approach, on the other hand, is a great way to ensure sustainable infrastructure when compared with purely pursuing financial outcomes. It is the right thing to do from the perspective of both people and planet. It is also the right thing to do as a business.

How do you expect impact within infrastructure to play out? Do you expect more funds to classify as Article 9?

Because there is still some ambiguity around definitions, most regulators in Europe are letting people get away with classifying as Article 8, which is really just basic ESG. That in itself is great progress, of course, because firms can no longer just talk about ESG, they actually have to implement it. Going forward, however, I think the EU will begin to be more prescriptive and more descriptive about what it actually means to be Article 9, or 9.1 or 9.2, and as that happens, firms will increasingly understand that to achieve that status you need to set goals, measure results and then report on them.