Box-tickers beware: ESG is on the verge of completing its journey from tree-hugging ‘nonsense’ to a bona fide investment requirement. As Anton Pil, managing partner at JPMorgan Global Alternatives, put it in a recent guest article in sister publication Infrastructure Investor: “ESG has become the dominant trend shaping the private infrastructure investment landscape.”
Much as we agree with Pil, it hasn’t escaped us that the box tickers have been able to find plenty of refuge in the ‘E’, while often ignoring the ‘S’ and, to a lesser extent, the ‘G’. Considering the planet is going through an existential climate crisis, you might see the ‘E’, depending on how cynical you’re feeling, as the low-hanging fruit.
No more, though. Asset owners’ licence to operate – and by extension, their governance and corporate culture – are now very much under the spotlight.
For infrastructure investors, managers of essential assets serving diverse communities, that licence is a key part of their business. It’s that tricky subject that Infrastructure Investor tackled in its recently published roundtable. High stakes too because, as Columbia Threadneedle’s Ingrid Edmund highlighted, get it wrong and “someone is going to take away your return in the next 20 years”.
And yet, it’s still perplexing how many people in the industry give so little thought to these social-governance issues.
Take the “negative advertisement [generated] in cases where companies have gone bust, notably due to high levels of debt”, as Ardian’s Marion Calcine warned in the roundtable. That “negative advertisement” can put pressure on entire sectors, and that’s the case even when highly-indebted companies haven’t gone bust.
In the UK high levels of debt – and the impact it has on consumers – has contributed to a hardening of tone among the country’s utilities regulators. In a recent Financial Times article, Ofwat chairman Jonson Cox told water companies to prepare for “peak intrusion”, as he pushes them to be “more mindful of their social obligations”.
The ‘S’, of course, has long been the hardest nut to crack. JPMorgan’s Pil and Partners Group’s Esther Peiner, who also took part in the roundtable, both acknowledged how difficult it is to measure.
But the ‘S’ is crucial to engendering public trust, a volatile commodity these days whose importance the industry is, arguably, underestimating. As former CIA media analyst Martin Gurri – feted in some corners with predicting Brexit and the rise of Donald Trump – explained in a recent interview: “To function properly, industrial institutions need to have some proprietary control over the stories that get told about them. Once this control is lost, and a host of competing narratives about them arise, public trust inevitably starts to evaporate. This is what we see happening all around us.”
Ultimately, LPs will be key to ensuring the industry is delivering on the whole ESG package. The signs are that they are taking it seriously. First Super chief executive Bill Watson cautioned asset owners recently on the perils of offering a substandard service. And the Chicago Teachers’ Pension Fund is putting its money where its mouth is with its $25 million mandate for a minority/women-owned infrastructure firm.
As Peiner put it in the roundtable: “In five to 10 years, we will see that certain assets will be easier to divest because they are ESG-compliant, while others will sit on the shelf because no one will want them.” That will apply to firms too.