Sustainable dividends

Julia Prescot is on the trail. Not the fundraising trail, for once: the chief strategy officer of fund manager Meridiam Infrastructure (Meridiam) is currently campaigning for a seat on the Advisory Council of the United Nations’ Principles for Responsible Investment (PRI), the world’s largest investor network dedicated to embedding environmental, social and governance (ESG) issues in investment practices. And with the final election date scheduled for November 19 (shortly after Infrastructure Investor headed to press), she’s busy trying to explain why she deserves to be chosen for the council’s only “non-asset owner” position.

Her profile and background certainly makes her a good candidate. At Meridiam since the Paris-based firm’s inception in 2005, Prescot has long been one of its staunchest corporate social responsibility (CSR) advocates: she was instrumental in making ESG a key feature of the firm’s Ethics Charter and vision statement. She’s also served as a PRI signatory since 2010, and spent most of her career investing and advising on public-private partnerships (PPP) and private finance initiative (PFI) projects, which means engaging with public authorities and local communities has been part of her daily routine.

Her ultimate purpose, she says, is to hard-bake ESG principles in infrastructure investment processes, both at the asset owner and asset manager levels. She argues this has been important from the beginning at Meridiam, a reason why the firm is now well advanced in its task of incorporating sustainability issues at all levels of the decision chain.

“From the very start of our investment procedures, we ask ESG questions. We screen these issues throughout the process and each of our projects has to pass an exacting assessment.” This is supported, she explains, by the development finance institutions that invest in Meridiam’s funds, such as the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD).

All this leads Meridiam to publish an ESG report every year, a custom that started in 2010. The document provides a detailed account of the wide array of initiatives taken by the firm and its investment partners to address sustainability issues at the asset level. She cites a few examples: a €100,000 kitty allocated to assisting with crossing and safety around a newly built road in Finland; a special bridge to help wildlife cross a motorway in Poland; the successful replanting of a rare plant species away from the construction site of Ireland’s Limerick tunnel.

From an investor’s point of view, the rationale for doing all this is relatively straightforward, she says. “Some investors may ask: Is it going to make me money in the long term? Or is it going to stifle my returns because I spend too much time moving plants or making sure children get across the road? But at Meridiam we see ESG initiatives as a way to reduce volatility – because then we don’t have problems with the public sector side pointing the finger at us and saying we’re investing in a project but not doing it for the public good.”

In other words, looking after ESG issues proactively minimises what industry insiders sometimes call the “fat cat syndrome”, whereby private investors are seen as raking in undue profits from public projects. PPPs are meant to be genuine partnerships, Prescot explains, and the public has to be able to see the benefits it derives from it. And these efforts can sometimes pay other types of dividends: she recalls that after road safety initiatives were successfully implemented around Finland’s E18, the government soon decided to tender another motorway project as a PPP.

The argument stacks up, but to what extent is it really understood by investors? “Asset owners are going in the right direction in their thinking,” Prescot replies. “More and more institutions are now seeing the value of having elements of responsible investment in their strategy.” Yet a number of limited partners aren’t always specific enough in their demands to managers, she reckons. Some investors have only a small number of people looking after very large portfolios, she says, so not all of them can be expected to ask the right questions for each of them every time.

She thinks primary owners of projects – as opposed to passive investors – are often better armed to drive ESG principles within the day-to-day business of running an infrastructure asset. This is because they can develop the whole process themselves, which they can then monitor, promote and influence. The further away from the asset, the more difficult this becomes, she says.

One example of an ESG initiative where this is indeed the case is a PRI-supported module called the Montreal Carbon Pledge, which encourages investors to measure and publicly disclose, on an annual basis, the carbon footprint of their equity portfolio. “It’s not necessarily about taking dramatic steps to reduce carbon emissions but measure it throughout the portfolio to find where there’s potential for incremental improvement. That’s the sort of thing you can do to a greater or lesser extent the closer or further away you are from a project.”

So what needs to be done to embed ESG issues more firmly in asset managers’ – and asset owners’ – dealings with the asset class? Prescot thinks greater knowledge about the benefits of ESG policies is key. “It seems to be a no-brainer but it’s one of these areas where there is a gap between the research and the actual delivery.”

Hence the need to promote the academic study of the relationship between the public benefits of responsible investment and its actual financial impact on investor returns, something Prescot’s also been closely involved with. She’s done a significant amount of work with University College London (UCL) to set up their newly-launched Infrastructure Finance MSc, for instance, and points out that Meridiam has connections both with the Harvard School of Government and France’s École des Ponts ParisTech.

True, she doesn’t think asset managers are waiting for the results of such studies – some of which are very long-term projects – to feel concerned about ESG: a lot of blue-chip names have now signed up to the PRI. But she observes that few of them are shouting about it from the rooftops. “You have to assume that’s something they are concerned about but the real key to it is when people can quantify the impact of it. Beyond making them feel good, they want to know that the efforts they make enhance their returns one way or the other.”

Prescot is fighting the battle on other fronts. In addition to the ESG flag she’s flying on behalf of Meridiam, she is a co-founder – alongside Allianz Global Investors’ Deborah Zurkow – of Women Leaders in Infrastructure (WLI), an association focused on promoting female equality in securing senior positions and helping younger women rise through the ranks of infrastructure firms.

She is also president of the Sustainable Infrastructure Foundation (SIF), a framework supported by a raft of multilateral organisations which aims to enhance early-stage project preparation, particularly in developing countries.

“When you have a public-private partnership you’ve got two groups potentially pursuing different interests: one is looking after the public good, one is looking after the interest of the investor,” she says. “The way to bring them together is to balance out ESG.”