• Private markets
  • Real Estate
  • Responsible Investing

Common ground

Earning a social licence to operate in real asset investing

Successful real asset investing requires acceptance of asset managers’ practices and procedures from a variety of stakeholders. We explore what this means for managers, their clients and investment outcomes.

Read this article to understand:

  • The concepts of a social licence to operate and shared value
  • The role asset managers can play in creating shared value for all stakeholders
  • Key principles of best practice to earn a social licence to operate

Pursuing investment performance in a way that does not undermine society and the economy has become an imperative for asset managers for two reasons. Many of the world’s problems, from income inequality to climate change, are so far-reaching that solutions require the expertise and scalable business models of the private sector. At the same time, the legitimacy of business has been called into question, with companies including asset managers seen as prospering at the expense of broader society.1

Partly because of this, but also as the sustainable business movement has grown, stakeholder capitalism has seen a resurgence, reflected in environmental, social and governance (ESG) principles. But for investors in real assets, the manifestation of ESG risks is primarily an impact on people. Learning who those people are, how they might be impacted by your activities, and what you need to do differently as a result is how asset managers can create and maintain a social licence to operate (SLO).

“An SLO is the ongoing acceptance of a company or industry's standard business practices and operating procedures by stakeholders, including employees, suppliers, customers, communities or society at large,” says Emily Day, responsible investment associate at Aviva Investors, on secondment from consultancy Hatch. “It is created slowly, as a company builds trust with the community it operates in and other stakeholders, and maintained over time.”

Nowhere is this more relevant than for direct investors in private companies and assets. It is impossible to grow a company or create a successful place without a licence to operate. As the owner of a company or asset, an asset manager has employees and suppliers and is enmeshed within communities. The successful management of those relationships will bring benefits to those stakeholders as well as potential financial success to clients. For instance, the owner has a role to play in halting detrimental business behaviours in the supply chain by setting standards suppliers must adhere to in terms of living wages, labour standards and human rights.

In line with the Financial Reporting Council’s Stewardship Code, this dovetails with fiduciary duty, which dictates that those entrusted with deploying money into the markets must consider the needs of their stakeholders.

Driving for profits through companies or projects whose activities are detrimental to the health of suppliers and communities undermines the financial system

“Driving for profits through companies or projects whose activities are detrimental to the health of suppliers and communities undermines the financial system and should be seen as a market failure,” says Edward Vaughan Dixon, head of responsible investment, real assets, at Aviva Investors. 

An asset manager striving to build and maintain an SLO should therefore develop and manage projects with an aim to create shared value, which “results from policies and practices that contribute to competitive advantage while strengthening the communities in which a company operates”.2

That means creating profitable developments while delivering social value to local stakeholders. In this article, we explore the key components of social value, what it means for asset managers and direct investors aiming to earn an SLO and generate long-term investment returns, and we discuss principles of good practice.

Delivering social value

For the various stakeholders involved in developing or redeveloping buildings and places, delivering social value means creating places based on people’s health and wellbeing, says Matthew Morgan, co-founder and director at Quality of Life Foundation.

“Having a decent, affordable home that is part of a safe, healthy neighbourhood is the foundation of having a happy and healthy life,” he says. “A lot of places in this country do not deliver on those, and they lock in poor travel opportunities, not enough green space, a lack of social infrastructure. That is what we are seeking to address.”

Different frameworks exist to help developers define and deliver social value. The Quality of Life Foundation has developed one such framework around six areas of wellbeing: a sense of control, health equity, connection to nature, getting around, a sense of wonder and local community.3

Our concept of quality of life is health, wellbeing and social value

“Our concept of quality of life is health, wellbeing and social value. It encompasses elements of the hard stuff of urban planning, like green spaces or buildings,” says Morgan. “It also incorporates the soft stuff that's important but sometimes overlooked, like a person's sense of agency over decisions affecting their area, or the sense of community engendered by feeling part of where you live.”

Morgan says the framework is a practical tool that can form the basis of conversations when engaging with a community, but also a way of organising data to measure impact and a guide so community feedback and data inform design decisions.

Dr Jamie Anderson, urban wellbeing lead at engineering consultancy Buro Happold and research fellow at University of Manchester (UoM), adds it is essential to measure both objective and subjective wellbeing to understand the impact of a development on its stakeholders. Together, the company and university often use the UK Government Office for Science's “five ways to wellbeing”, an evidence-based framework that can be used to link a local area to key activities associated with mental health and subjective wellbeing. These are: connecting with others (or social interaction), physical activity, opportunities for mindfulness, learning opportunities and altruism.4

“Subjective wellbeing is about unapologetically measuring subjective human experience, which can be very different from objective measures,” says Anderson. “For example, a person or a community's experience of safety might be altogether different from objective measures like local traffic accident and crime rates.

Subjective wellbeing is about unapologetically measuring subjective human experience

“Built-environment professionals can use subjective wellbeing and five-ways measures to assess how their design supports – or thwarts – wellbeing across age groups, sexes and all the different backgrounds of community members,” he adds.5,6

Referencing a recent Buro Happold and UoM project at Brent Cross Town, working with a joint venture between Related Argent and Barnett Council, Anderson says they engaged with the community and multiple stakeholders to design public spaces that support high-wellbeing , or flourishing. The project also measures subjective wellbeing and the five ways in a robust manner.

“We are doing this with the community, so it’s not top-down,” he says. “Whether results are positive or negative, crucially, the joint venture partners are doing it with people and making use of that data to influence future design and the ‘softer’ side of things, like what kind of local community events and training should be prioritised.”

Place-based impact

In her book Housing for Hope and Wellbeing, Flora Samuel, architect and professor of architecture at the University of Cambridge, looks to define and map the wellbeing dimension of social value, including factors such as community, connection with nature and autonomy, and explores how housing contributes to it.7 In her approach, she calls for investors and developers to consider broader impacts.

Local development plans have to ask for social, environmental and economic value

“Local development plans have to ask for social, environmental and economic value, and investors should be investing on the basis of these dimensions of value,” she says. “They need to chart and spatialise them, and the buildings need to be procured based on the value they deliver. Then, post-occupancy evaluation (POE) needs to capture the development of that value asset management going forward.”

She advocates an evidence- and map-based planning system able to capture social value across its multiple dimensions.

“I believe social value has to be mapped because it's highly contextual,” she says. “You need to see with great specificity where the value is being created. For a project we are conducting in Anglesey, where the children are the most obese in Wales, we found kids weren't going to the playground in a certain area because the parents didn't have a bench to sit on. It's these small things we need to capture, especially as we think about climate change, adaptation and resilience. It’s about using money more intelligently and specifically.”

The Good Economy, a social impact advisory firm, takes a similar, place-based approach for investors wanting to make a material difference locally.8

Figure 1: Place-based impact investing conceptual model

The architecture of place-based impact investing

The architecture of place-based impact investing

Source: The Good Economy, 2023.

“Impact is felt in places,” says Mark Hepworth, co-founder and director of research and policy at The Good Economy. “A place-based approach gives you much more understanding and control. You can see who you are trying to help.”

The Good Economy’s 3E model helps investors map out where to invest along three areas:

  • Ecological sustainability: The just transition to net zero, governance and political support, lifestyle changes, enabling technologies, net-zero transition finance.
  • Essentials of everyday living: Housing, town centres, education, health and care, utilities and food supply.
  • Economic dynamism: Entrepreneurship and skills pathways in innovative growth sectors and small and medium-sized enterprises (SMEs).9

Even asset managers whose strategies do not meet all the criteria required to be labelled as “impact” funds can follow those principles to map out where they are investing to deliver social impact.

“The 3E goal framework offers a societal-level perspective on place-based impact investing. From our experience, it resonates closely with the strategic objectives of local stakeholders and impact-seeking investors,” says Hepworth. “In combination, the framework and conceptual seven-pillar model can provide investors, local stakeholders and other sectors with a roadmap for designing and aligning strategies based on the core principle of shared social impact creation.”

The 3E goal framework offers a societal-level perspective on place-based impact investing

Dixon argues the key elements asset managers should consider when investing in a development are employment, skills and training; education; investment in the community; and investment in social features and public spaces, such as amenities and common areas for socialising.

“Creating access to employment, skills and training requires a commitment to developing meaningful partnerships with your supply chain and communities. This is the only way to start to create employment opportunities for individuals who face the most significant barriers to accessing them. It takes time and focus,” he says.

Education focuses on encouraging local young people to make informed decisions about their career and industry pathways, while community investment involves supporting the local community by dedicating time, money or resources in kind to environmental and social projects.

What this means for asset managers

To earn an SLO and deliver shared value, communication is the most important factor. A 2016 Harvard Business Review article lists five elements necessary to achieve shared value, including a common agenda, shared measurement system and constant communication.10

“A lot of investment managers are quite good when it comes to setting a strategy on what they'd like to achieve, but we also need to create partnerships to make that happen,” says Day.

Dixon adds asset managers can support the delivery of social value by engaging their portfolio companies to build skills and capacity, particularly during the early stages where embedding a focus on stakeholders can help a business grow sustainably. They should also manage design teams to set a clear brief for social design features to be integrated into development and refurbishment projects; and manage developers and construction contractors, setting out contractual deliverables to go over and above planning compliance.

It is important to connect different parts of the supply-chain ecosystem with each other

“It is important to connect different parts of the supply-chain ecosystem with each other, for example connecting suppliers with people looking for job opportunities and connecting occupiers with the communities they operate in,” he says. “In 2023, we established a social value steering group for London to facilitate the growth of a network of employment needs and opportunities for fair and inclusive work in construction. The group support us to help fulfil our main contractors’ social value targets for real estate developments in London.”

Sarah Forster, co-founder and CEO at The Good Economy, says building a network of trust – as well as knowledge – between investors and local authorities is essential.

“Most investors don’t fully understand the planning system, how decisions get made and some of the problems that arise,” she says. “Similarly, local authorities need to understand how to package local development projects as investable propositions. And investors and authorities should be actively engaged in the procurement decisions around developers to ensure local needs are met.”

Figure 2: Stakeholder alignment and collaboration are key

Stakeholder alignment and collaboration are key

Source: The Good Economy, 2023.

Morgan adds asset managers should engage with communities as early as possible. If the local authority can see there has been a process of engagement that has garnered local support for a project, it will reduce the risk when requesting planning permission.

“Community engagement increases trust, not just with the residents but with the local authority,” he says. “And it provides better outcomes because that local knowledge and voice will ultimately help deliver on local need.”

Dixon adds it is important to consider the broader area that will be impacted by a development or ongoing management of an asset. That can be achieved by working in partnership with local authorities, landowners or housing associations, all of which have a stake in the community.

“You have to be taking that long-term view with them, otherwise you're not going to be a good partner,” says Morgan. “Engagement continues and should go through to post-occupancy. It is key to learning what works and what doesn't, and to maintaining that contact with local people.”

Working with stakeholders can help avoid unintended consequences

Working with stakeholders and robust evidence can help avoid unintended consequences like planting trees that worsen local children’s hay fever or having people benefit from an affordable housing scheme who then let out the property and profit doubly.

“Sometimes, having ticked the box in their social value framework, people assume it is delivered without checking the outcomes are what they expect or what the community actually wanted,” says Dr Margarethe Theseira, head of UK consulting at Buro Happold.

She adds regular engagement needs to be maintained because a development will often create new communities that will have to integrate with the residents already living in the area, and because people will move in and out of development agencies, so the initial view may not survive the change in the staff delivering it.

And it is essential to maintaining an SLO.

“With stop-start consultations that are patchy and don’t build on one another, the community get annoyed they don’t get feedback,” says Samuel. “Whereas all the research points to the fact that, if you make something people feel invested in, they take care of it, so it makes the long-term job as asset managers much easier.”

The impact on returns

It therefore doesn’t have to be a question of prioritising social value over profits – or vice-versa.

Firstly, taking a shared value approach can enable asset managers to develop sites that are fit-for-purpose, resilient and adaptable to changing requirements, and not necessarily for a higher cost.

“It is site-specific and dependent on what you are trying to achieve. But if you involve the community early on in helping to define the solutions and not just challenges, you will often find they can do it in a cost-effective way,” says Theseira.

Places with features that appeal to residents tend to dovetail with quality and efficiency

Secondly, places with features that appeal to residents tend to dovetail with quality and efficiency, as well as climate resilience and sustainability. That makes them more valuable, particularly in the long run, and mitigates the risk of the assets becoming stranded as environmental regulations become more stringent.

“We're talking about creating places that are better for people in the long term,” says Morgan. “Those places tend to be better for the planet, in that they are more resilient in terms of the climate emergency, and tend to be more valuable.”

For asset managers, this should be considered part of meeting their fiduciary duty. It can help boost their reputation and make them more competitive when bidding for projects, securing the best suppliers and investing in target companies. Going beyond this, investing to help suppliers be more resilient, for example, improves the supply-chain ecosystem for everyone. That delivers true shared value.

“We can ask whether a project or initiative will lead to us being more competitive against our peers or if it will enhance our reputation,” says Dixon. “Will it also lead to a stronger supply chain or skills and capacity building in a particular group or segment of society? If it is the latter, this is what we would consider to be good stewardship or shared value – contributing to building a more stable financial system whilst delivering returns today.”

Optimising shared value

Optimising shared value (to deliver both investor returns and social value) begins with project selection. To maximise the social value of a development, asset managers can identify the areas that would benefit most from local investments.

“For example, if they're doing retrofit investments, how are they selecting which areas to work in?” says Theseira. “Have they got a portfolio approach to locations that would benefit more from uplift or retrofitting, or is it solely based on financial criteria? Selecting projects for their social value as well as financial returns is where there could be further efforts.”

However, this must be complemented by an assessment of financially material risks in a potential asset, be it a company or a direct investment in a building or piece of infrastructure. From an SLO standpoint, that is a no-brainer. Not only are social risks financially material, so is the upside of treating people well.

For instance, while some research has found the average negative stakeholder event reduces a company’s share price by 1.31 per cent, for negative events related to community and the environment, the impact is closer to minus three per cent.11 In contrast, the Good Jobs Institute has shown companies that apply a “Good Jobs Strategy” reduce employee turnover, improve productivity, customer service and sales, and build a long-term competitive advantage.12

“We have begun assessing financially material social risks in a few of our real-estate developments, and we have sought to mitigate them by embedding solutions into contracts, clauses and leases,” says Dixon. “Those need to be backed up; the presence of an expert team is required to manage any issues well. But it is not just about risk; it can be about value creation too.”

The nature of the financing is important as well to ensure small suppliers and companies do not find themselves with unmanageable debt burdens, but also to create fund structures big enough to attract institutional money.

“The nature of the financing should be aligned to the opportunity and with good governance and risk sharing,” says Forster. “If investors are intentional about creating social value, they need to develop an impact management and measurement framework upfront and truly integrate impact into their decision making. By focusing on the real-world outcomes of an investment – and holding themselves accountable for delivery – investments in places are most likely to be good for the people who live and work there and good for the investor.”

Raising standards

Once a project has been selected, qualitative and quantitative data collection is needed to establish a baseline of needs that can be compared to other geographies and, over time, measure the positive and negative social impacts of a development. Professor Samuel and the community consultation for Quality of Life research team she leads are creating a code of practice for planning consultation to enable local authorities to differentiate between good and less good participatory processes. It is particularly important to ensure a representative demography is part of the story.

Setting aside resources to keep engagement and data collection going over the lifetime of a project is good practice

“We're trying to provide the basics for everyone: eight key principles that go through the process to make sure engagement is as inclusive as possible,” says Morgan. “Hopefully, if everyone meets the excellent standard, we will see a general uplift in quality. We have lacked standards in UK housing for many years, whether that’s build quality, engagement or post-occupancy. There are real basics we need to measure and support.”

Setting aside resources to keep engagement and data collection going over the lifetime of a project is also good practice. It will enable asset managers, owners, operators and developers to hold themselves accountable, but also evolve projects over time as the community changes and, crucially, to maintain community trust and their SLO.

“A POE is a step in the right direction,” says Anderson. “But if we don't have a strong baseline to compare to, then feed back to our residents and keep the loop going, we're not maximising the value of doing that POE in the first place. You want the community to remain engaged with the development over time and avoid waving fingers in the air when referring back to what things were like, prior to the project starting.”

Industry-wide transparency and data-sharing on projects could also be hugely beneficial to improve and harmonise standards.

“We know what a good standard looks like in health and medicine,” says Anderson. “But what is it like for us? I don’t think we’re having that conversation properly on qualitative and quantitative standards. We need to continue improving the evaluation side of things and being transparent about data sharing – facilitating accuracy and fostering trust in decision making.”

For asset managers, Dixon proposes adopting a minimum industry standard which, without being full impact investing, is at a level above planning regulation. This would entail:

  • Proactively managing and engaging partners to create employment, apprenticeship and work experience opportunities within the supply-chain ecosystem or company value chain, delivering above the minimum standard.
  • Dedicated staff volunteering programmes driven by a structured approach to understand stakeholder needs in the communities asset managers invest in.
  • Paying the local living wage within the immediate supply chain, where staff are dedicated to a single or series of assets within the asset manager’s control.
  • Understanding the impact of designs on the health of communities, delivering high-quality design interventions that respect the needs of stakeholders – including building users and the local community – and exceeding minimum regulatory and planning requirements.

This should embed processes that ensure communities are engaged from design through to post-occupancy.

“If we do this, we will earn our SLO. This should be a minimum requirement for asset managers and a core part of modern fiduciary duty,” says Dixon. “But delivering shared value goes deeper. It involves an approach that creates value for the investor whilst building capacity and capability within the supply chain, towards an ecosystem that can support future investments.”

Subscribe to AIQ

Receive our insights on the big themes influencing financial markets and the global economy, from interest rates and inflation to technology and environmental change. 

Subscribe today

Related views

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but, has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act 2001 and is an Exempt Financial Adviser for the purposes of the Financial Advisers Act 2001. Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

The name “Aviva Investors” as used in this material refers to the global organisation of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.

Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is based within the North American region of the global organisation of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province and territory of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.