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What are the implications of levelling up from an investment standpoint?

Find out more in this episode.

[Intro music]


As we learn to live with COVID-19, focus is returning to the delivery of a just transition. As we discuss in this episode of the AIQ podcast, ‘levelling up’ left-behind communities is important to secure long-term investment outcomes, but also presents direct opportunities.

Minouche Shafik

The social contract is how we organise the provision of collective goods in our society.

And in every society, there’s a social contract that underpins all of the key stages of life — how we get educated, what happens when we get sick, what happens when we get old, how do we work? And what we owe future generations as well.

I think our social contract is broken. And that is at the heart of why our politics is so divided and so many citizens around the world are disappointed and frustrated.


That was the voice of Minouche Shafik, director of the London School of Economics and Political Science, in a recent interview with the McKinsey Global Institute.

During the COVID-19 pandemic, vulnerable communities were hit the hardest.  Yet the fraying of our social fabric long predates the pandemic, driven by structural changes in economies and societies which we have so far failed to adapt to. The technological revolution of the last 40 years has transformed economies, destroyed far more jobs than globalisation and left many unskilled workers with few options, while so far failing to deliver inclusive growth.

Vaidehee Sachdev, people pillar lead and senior impact analyst at Aviva Investors, says addressing this must fall to companies and policymakers.

Vaidehee Sachdev

We often talk about how economic growth and capitalism have pulled millions of people out of poverty and reduced inequality globally and, while that may be true in between countries, we know that within-country inequality has been increasing for a number of years. And we know that there are a number of changes that society’s experiencing – the digital revolution, the net-zero transition, the pandemic – that are only going to amplify and intensify those inequalities unless we do something soon.

And yet, it’s surprising that a vast majority of companies are not meeting their social responsibility to act in the interest of all stakeholders. They haven’t understood the role that they play in society’s prosperity as a whole. And so, sadly, I think we have to compel companies to care, which is ultimately a matter for policymakers – because the imperative to act is clearly now.


Robust communities strengthen the social contract and are more resilient in the face of crises. Through people’s social and political engagement, communities also hold the state and markets to account so they don’t descend into authoritarianism and cronyism. That gives people a sense of identity, but also a sense of self-determination and direct control over their lives, at the same time as making public services work better.

But Minouche Shafik says the social fabric is fraying due to major shifts that are changing its very nature.

Minouche Shafik

Traditional families, getting educated from age six to 20, having very few employers — our old model was premised on those kinds of assumptions, which are no longer relevant to our societies where women are working, people have flexible jobs, people’s jobs will become more flexible with technology. And people are living much longer and will need to retool and reskill later in life.


However, at the heart of community loss is the economy. Since the 1990s, middle-wage jobs have been disappearing in favour of high-pay/ high-skill and low-pay/ low skill occupations.

As a result, some communities in developed countries have seen large job losses, which devastated areas dominated by one or two large local employers that shut or offshored production. Andrew Carter, CEO at the Centre for Cities, says it’s a vicious circle.

Andrew Carter

Part of the challenge is that all these issues are interlinked. They reinforce each other in a vicious downward cycle, kickstarted by negatively changing economic fortunes of places. Without reasonably performing economies and decent numbers of jobs, including high-paying ones with career opportunities, our ability to deal with associated social and community issues in struggling places will be significantly constrained.


It’s important for investors because inequality and the breakdown of communities impede economic growth, fuel social unrest and raise the likelihood of financial crises. A 2014 OECD study across member countries reinforced this, showing a 1% increase in GDP per capita inequality lowered overall GDP by 0.6%.

At a company level, Siddhartha Bhattacharyya, senior portfolio manager of buy-and-maintain credit at Aviva Investors, says it is particularly important for investors who manage long-term client assets to understand what companies and institutions are doing for the future.

Siddhartha Bhattacharyya

We don’t know where margins will be in 30 years’ time. Looking at a university bond, we want to understand their research and scientific investments, their endowment plans and what they are investing in for future benefits, and that is relatively easy. But when we look at a company, it is more difficult, so what they are doing right now for future generations gives us a lot of comfort.


Revitalising left-behind communities is therefore important and in the UK Andrew Carter says this means prioritising growth in the big cities outside the South East.

Andrew Carter

Compared to their European counterparts like Munich, Hamburg and Lyon, big British cities like Birmingham, Manchester and Glasgow underperform on a range of economic indicators and it's not really feasible to have a more prosperous North or Midlands if the biggest cities are underperforming. The good news is that investors, entrepreneurs and firms are increasingly interested in these cities as attractive locations to live, work and invest.


To harness this interest, governments, both local and national, first need to rebalance healthcare and labour risks. Healthier people can be more productive, and can more easily plan, retrain and seek better work if they bear less of the labour risk.

Bhattacharyya says governments should also invest in training for skills of the future and lifelong learning and improve infrastructure, from affordable housing to transport and digital connectivity.

Siddhartha Bhattacharyya

In some remote parts of the UK, it is very difficult to get an internet or even a 4G connection, never mind 5G. Greater government support to improve this could allow more people to work remotely, for instance for a London-based company, while still living in more rural areas.


This will all have a significant cost, and governments will have to invest, says Carter.

Andrew Carter

If the white paper is true to its word, we would expect a significant increase in investment into levelling up post-2025. Think about the German reunification; that's 30-plus years, €2 trillion spent and is still going. That averages out at about €70 billion a year over a 30-year period.

The funding involved will need to be large because the challenges the levelling-up agenda is seeking to address are large and long-term, at least 100 years in the making. Post-2025, if the government – any government – is serious, the funding made available will need to increase considerably.


While this can be partly achieved through regulation and public spending, the private sector has an important role, both in terms of investment and economic activity.

Vaidehee Sachdev

One obvious way businesses can address concerns about social mobility is simply by thinking about the basics: where do they set themselves up? Who do they hire? What kind of flexibility do they give workers? What support is given to workers from different backgrounds? Etc. As well as the more fundamental things – the basics of what constitutes decent work and decent jobs like paying a living wage and engaging in constructive dialogue with workers and their representatives. This isn’t rocket science – treating people well should not be a revolutionary idea.


Governments and investors will need to incentivise this change, as well as investing in the infrastructure and workforce skills needed to revive communities.

The UK’s Levelling Up paper recognises this huge potential for institutional investment to support infrastructure, housing, regeneration and SME finance. Ed Dixon, head of responsible investment for real assets at Aviva Investors thinks it’s feasible to reallocate enough investment towards specific opportunities.

Ed Dixon

If all local government pension schemes were to allocate 5% to local investing, it would unlock £16 billion, which is far in advance of the £4.8 billion levelling-up fund.

[…] 5% is a big number, in the whole digits rather than bps, but it's still only 5%. That illustrates that, actually, it would probably be quite easy to do this, to go past top-level sectors to some very specific opportunities like sustainability-linked lending.


The Centre for Cities has set out two goals the levelling-up agenda should aim to achieve: improving living standards, and helping every place reach its productivity potential. This includes improving skills, transport and communications infrastructure, but also commercial real estate and public spaces.

Ed Dixon says a tie-in between town-centre regeneration and long-income real estate has provided significant opportunities in recent years.

Ed Dixon

Partnerships between local authorities and long-term investors can benefit both local authorities, investors, and the communities they operate in. Very-long-dated real-estate leases make it more cost-effective to regenerate town centres, in comparison to short term financing.

With new investor appetite for place-based impact investing, we could see the volume of patient capital investing through long-income scale up, creating huge opportunities for local authorities and investors. If we can replicate the success of town-centre regeneration schemes like Aberdeen and Stevenage delivered over the last few years, with impact metrics embedded from the start, everyone would benefit.


George Fraser-Harding, real estate fund manager at Aviva Investors, says opportunities can also be found in commercial real estate and family housing. On the commercial side, he mentions a site in the former East Germany, in an area where jobs and population have been declining.

George Fraser-Harding

Normally, an area with a declining population and jobs doesn't seem like somewhere you would invest, but we have engaged directly with the municipality, which has government support to offer incentives for companies to move there, so there may be an opportunity to develop a large logistics park. We will be able to attract tenants because they will receive large subsidies to go there, and the project is cost-efficient.

The local municipality is excited about the project because they can see this turning the tide for their area, and their level of engagement has attracted us. By working together to enable sites to be created in the right way, we can achieve our goal of built, occupied and income-producing buildings and the municipalities can achieve their goal of job creation and population growth.


Fraser-Harding also lists housing projects aiming to provide long-term, affordable rental housing to meet increasing demand as families who can no longer afford to buy move into long-term rentals.

George Fraser-Harding

In the UK, the rental market for family houses is almost entirely in private hands. That comes with a lot of uncertainty for young families looking for a long-term home. As an institution, we can create a product built specifically to be let for its lifetime, giving families certainty they can stay for as long as they want, and that the property will be maintained.


Dixon adds that, provided the financing is structured in the right way, the net-zero transition provides similar opportunities to level up and improve buildings.

Ed Dixon

We have structured over one billion pounds of commercial mortgages to encourage borrowers across the UK to improve their properties. That creates green jobs and delivers better places for the communities who use those buildings.

We can’t forget the importance of renewables. Especially over the last few months, energy resilience has become a critical subject. The more land and roof space we give over to solar, which is now cheap and easy to deliver, the easier it is to provide cheap energy to companies or homes. And you can provide scalable, institutional-quality investments off the back of that, which could end up benefitting the savers and pensioners in those very communities.


Yet there are risks, from gentrification to implementation with unintended consequences. Here is Ed Dixon again.

Ed Dixon

If the financing of a social housing project, for example, is not structured in the right way, you may end up with perverse outcomes tying housing authorities into overly onerous leases, or debt structures that contribute to negative social outcomes.

On the flip side, structured financial incentives can create a partnership between finance and borrowers where both sides, as well as their stakeholders, benefit from a better outcome.


The policy side is arguably the area that presents the greatest risks, and continued dialogue with governments is important.

For example, as we develop net-zero industries and new jobs take the place of carbon-intensive ones, we must think about how to replace closing industries, especially where one factory or sector is central to a community.

At the same time, Thomas Tayler, senior manager at Aviva Investors’ Sustainable Finance Centre for Excellence, says climate change could make some areas unliveable within a few years due to rising natural disaster risks.

Tom Tayler

In the UK’s green job strategy, Yorkshire and the Humber are due to get a big renewables and green hydrogen investment, but has it been thought through whether rising sea levels and changing flood maps could mean that's going to be regularly underwater in ten years?

Investors need more detail of the sector pathways needed so we can work out where to invest in the net-zero transition, but there also needs to be a read across to the levelling-up agenda.


Short-term political and economic incentives also need to be better aligned with what we know we need to do in the long term, both for the transition and levelling up.

Tom Tayler

People are worrying about inflation, and energy prices in particular. An economist at the European Central Bank recently talked about the fact inflation shouldn't be a reason to slow down the transition, but governments need to step in and make sure that the transition isn't achieved off the back of those least able to afford it. They need to build social safeguards into their energy transition plans to make sure people aren't being put into energy poverty.

It is essential to recognise the risks and build them into forward planning for deciding where to allocate resource and focus. When it comes to levelling up or addressing the impacts of climate change and biodiversity, policy needs to take a holistic view and think across all those together.

[Outro music]


Reviving our communities and repairing the social fabric will take time and investment, and it comes with risk. But it also presents a plethora of investment opportunities that can benefit investors, society, and the planet.

If you would like to find out more about the views of the leading analysts and academics featured in this piece, please go to AIQ’s Investment Thinking at

Thanks for joining us.

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