Of the three pillars of ESG, the social element is arguably the hardest for real assets managers to track and fully integrate into a long-term sustainability strategy. Unlike environmental and governance reporting, the data is generally more qualitative in nature, since standardised frameworks and regulations on social matters are still nascent.
“Environmental factors are typically more visible and easier to capture by indicators and include in ESG monitoring and reporting frameworks, while governance is a standard element of GPs’ assessment and monitoring,” says Silva Deželan, ESG director at fund manager Stafford Capital Partners. “Social factors prove to be more difficult, but this does not mean that they are any less important.”
Indeed, Kristina Kloberdanz, chief sustainability officer at Macquarie Asset Management, adds that you cannot have a sustainable future that is not inclusive of social considerations: “Managers that neglect the ‘S’ in ‘ESG’ do so at their own peril, not just because these topics matter to a company’s workforce and the wider community, but because it makes good business sense.”
Channelling community engagement can also have a powerful impact on employees looking for businesses that align with their values, according to The Carlyle Group. In a tight, recessionary labour market like we have seen post-pandemic, a strong social ethos can attract motivated staff and often improves retention rates, not to mention boosting brand reputation.
There is particular resonance for infrastructure investors here. “Social factors have long been a cornerstone of infrastructure investing,” says John Anderson, global head of corporate finance and infrastructure at insurer and asset manager Manulife. “Our companies have large visible public footprints, which is why they’re heavily regulated and why good management teams make the effort to demonstrate how they’re supporting the public good and public interest beyond the basics of permit compliance.”
That is not to say that there has been no progress at all towards industry standardisation on social reporting. This year, the EU Commission published its proposed Social Taxonomy to help guide financial institutions on social impact. The final report highlighted a $2.5 trillion to $3 trillion gap in annual financing needed to achieve the UN’s Sustainable Development Goals.
The framework follows in the footsteps of the EU’s Taxonomy Regulations, which initially only covered environmental concerns. The proposed Social Taxonomy provides guidance and standardisation to managers, although it is yet to be globally recognised. This summer, it was suspended by the European Commission as the bloc turned its attention to the war in Ukraine and inflationary pressures.
Nonetheless, LP scrutiny is ramping up pressure on managers to integrate the social side into their monitoring and reporting practices. “With the upcoming EU regulation on mandatory human rights due diligence, we see an increased focus on social factors,” says Axel Brändström, head of real assets at Swedish pension fund Alecta. “Pre-investment we have integrated questions around this in our ESG due diligence process and other social factors that we keep an eye on are health and safety as well as diversity.”
In February, the European Commission adopted new legislation on corporate sustainability due diligence. The directive means firms are obliged to identify, prevent and account for negative human rights and environmental impact on the company’s own operations, subsidiaries and supply chains. Certain large firms also need to provide a plan to show that their business strategy is compatible with the Paris Climate Agreement.
Even while more sophisticated reporting criteria are being developed, there is much that infrastructure investors can do to demonstrate socially minded action to their LPs. Himanshu Saxena, CEO at fund manager Starwood Energy Group, points out that “social integration can be easily tracked through alignment of business activities with any one of the UN SDGs”, adding that “internally, tracking workforce churn and retention, and improving diversity statistics across all layers of an organisation are key”.
Enhancing employee health and safety practices and setting proxy voting rules that support board diversity are further examples of easy-to-implement social initiatives that managers might consider adopting.
Deželan adds that other existing frameworks worth aligning to include the International Labour Organization’s conventions, the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises.
As with all areas of ESG, education is once again important. The Carlyle Group uses the Global Reporting Initiative framework for reporting and offers ESG training across teams, centralised ESG resources on the firm’s intranet, dedicated internal personnel on ESG, ongoing mentoring and employee engagement programmes and ESG-linked compensation.
A quantitative approach also has its merits when used appropriately. Legal & General subsidiary LGIM Real Assets built a bespoke in-house data dashboard to track metrics relating to asset performance, customer engagement, demographics and KPIs for key initiatives. “An important factor of this data dashboard is its adaptability,” says Shuen Chan, head of ESG at the firm. “The communities in which we operate face different challenges, have different wants and needs, and therefore it is essential that the measurement of impact outcomes is adapted and flexed to consider the specific asset and its context.”
Lending a hand
A South African renewables initiative offers leadership training and focuses on research and innovation to deliver socioeconomic change
“It is vital that investors avoid carbon ‘tunnel vision’ and always consider the social component of the just transition,” says James Magor, director of sustainability at London-headquartered Actis, discussing the manager’s involvement with South Africa’s Renewable Energy IPP Programme (the REIPPP), a tender process to aid private sector green investment.
Actis says it spotted a skills gap when deploying socioeconomic funds and realised this was a missed opportunity. “Alongside our African portfolio companies, Lekela Power and BTE Renewables, and with the endorsement of the wind and solar industry associations, SAWEA and SAPVIA, we founded the Initiative for Social Performance in Renewable Energy (INSPIRE),” Magor says.
INSPIRE is a centre of excellence that teaches social performance managers at IPPs across South Africa how to maximise their positive social impact. “This is not only benefiting our projects but the industry as a whole and enhances South Africa’s just transition,” adds Magor.