The inequalities highlighted by COVID-19 have led to much soul searching, including among investors on whether they are doing enough to address the issues of the day. Ed Dixon, Aviva Investors’ head of ESG - real assets, contemplates how investors in tangible assets can put capital to work to drive change.
Claims that COVID-19 has fine-tuned awareness of social issues and their importance in investment decision-making are everywhere in the asset management industry. Yet there is no meaningful evidence to show managers are channelling finance more effectively to achieve social goals – to address health, equality and opportunity – and delivering more impactful investments than in the past.
Much of the popular narrative seems to focus on the capacity to ‘do well by doing good’. But managers looking into their portfolios with a critical eye during the pandemic would likely have seen a more mixed picture.
Managers must look at the potential for doing harm as well as the opportunity to deliver positive impact
Investment in the built environment, particularly the construction and operation of buildings and infrastructure, is one of the largest contributors to pollution in cities, which has been proven to exacerbate health crises.1 Over 150 outbreaks of COVID-19 have been reported from construction sites, where work continued through lockdowns while many other workplaces shut.2
Uncomfortable as it may seem, to truly deliver social value investment managers must look at the potential for doing harm as well as the opportunity to deliver positive impact. How can they create real benefits for communities and avoid social washing, exaggerating or misrepresenting what they do?
Understanding what social value is
One challenge is that, despite (or perhaps because of) a plethora of frameworks, there is no broad agreement on what social value is or how to measure and report it.
In the UK, the interpretation has grown out of legislation3 designed to improve public procurement, which led to specific guidelines around identifying social themes and measuring outcomes. Despite this, the term is still hijacked intermittently by groups wanting to highlight the aspects of greatest interest to them. Identifying what social value is or who is generating it depends on who is asking the questions.
This is a problem that consultants at Hatch have been grappling with. (Read more about their approach, here.) They believe proper consultation with stakeholders in developing buildings and infrastructure, for essential services like utilities, transport, energy and health, can lead to positive outcomes for society, where each solution is carefully tailored for its own context.
Currently, UK social value assessments often focus solely on procurement and supply chain management, reflecting the history of the legislation. The approach is well established, but it is possible to develop a more rounded view by looking right across an asset’s development life.
Consultation is a critical factor to ensuring community needs and concerns are met. It ultimately determines whether an asset will deliver social value and benefit those that use it. A comprehensive approach includes targeting specific features in the design phase, ranging from delivering affordable workspace to community space and publicly accessible green infrastructure, with the final characteristics based on the findings of the consultation. Although this sounds blindingly obvious, it is seldom delivered in practice.
Later in the process, managers must target employment opportunities to those that need it the most. Insisting on equality, fair payment and prompt payment terms are also vital, to avoid the harm that can be created through poor governance in unchecked supply chains.
Tracking these indicators to completion and then monitoring until the end of the asset’s life can help ensure stakeholder expectations are met and meets the growing need for social value disclosures that will help channel further investment into impactful projects.
Financing structures
Of course, delivery depends on getting the right financing structures in place at the outset, at home and elsewhere. For example, using guarantees from sovereigns or supra-national organisations like the World Bank or Asian Development Bank can help ensure lending flows to countries or companies with modest or fair credit ratings, to deliver specific social goals. Recent examples include €500 million of debt issued to fund a water and sanitation plant in the Republic of Botswana and US$ 1.5 billion to fund a railway construction project in Tanzania.
Delivery depends on getting the right financing structures in place at the outset
That same approach can be helpful in the delivery of affordable housing. In Panama, for instance, we took comfort from a World Bank guarantee to underpin a project delivering on two counts: expanding access to housing finance to lower-income segments of the population and designing and implementing long-term funding solutions.
Getting these details right can generate positive effects on the ground and ensure investments contribute to achieving the UN’s Sustainable Development Goals. Sustainable buildings, well-designed spaces, opportunities for long-term, secure jobs in healthy conditions with prospects for training are all difficult to argue with.
Conversely, failing to address these areas carries obvious risks for those involved. Dented reputations or ‘brown penalties’ for construction that falls short on environmental criteria are increasingly likely for those that do not take their responsibilities seriously. And investors seeking strong investment returns from speculative developments may see planning applications denied where proposals are deemed unattractive to communities and local authorities.
Making progress
The question then is what needs to change for the industry to get a better handle on progress and who is generating value where. This is important, as investment managers will only be able to make the most impactful decisions if they can consistently forecast, monitor and measure.
Managers need to back their favoured framework and not delay through indecision and the paradox of choice
Several social value frameworks already exist and more will follow. Managers need to back their favoured framework and not delay through indecision and the paradox of choice. The National Social Value Measurement Framework4 already has significant reach in the UK, while the Urban Land Institute’s Road Map for Social Value in Real Estate5 and the Institute of Civil Engineers’ Maximising Social Value in Infrastructure Projects6 offer compelling frameworks for embedding value in design and delivery. The UK Green Building Council’s briefing on Driving Social Value through Real Assets7 and Framework for Defining Social Value8 also offer attractive starting points for those new to the topic. With so many resources available, there is no room for excuses from investors who have not yet started on the journey.
Ultimately, measuring value relies on additionality: establishing what has been achieved over and above what might have occurred anyway. Outcomes range from social attribution metrics that try to isolate the value created in monetary amounts to narratives explaining how life may have changed for those using buildings and services. But the range of approaches means it is difficult for investors to make direct comparisons between competitors acting in a vast and fragmented landscape.
It is possible, however, for individual managers to monitor progress by establishing their own baseline and developing a consistent approach to assessment to evaluate what has been achieved.
Setting a high social bar
The conversation around building back better is likely to create opportunities for asset managers that can differentiate themselves by financing assets of wider benefit to society. But how those assets are financed is key, with managers needing to go beyond standard due diligence to structure and manage investments in a way that focuses on delivering social value and minimising harm. Those that can deliver sustainable returns alongside positive impact, evidenced by dependable metrics, will have an obvious advantage. Understanding communities to ensure the right asset is financed in the right place is inevitably complex, because individuals, communities and human society are so nuanced.
Giving careful attention to the human impact of developments is an essential part of the process
Today, best practice means setting out transparent social goals from the outset of a project: in its design, financing, procurement, construction, operation and even decommissioning. Although there are still likely to be trade-offs, giving careful attention to the human impact of developments is an essential part of the process.
Getting the details right will be hard: investors need to understand the available frameworks, partner with the right consultants and ensure social value is prioritised in their own teams and their supply chains. A much more focused and calculated effort is the only way to really impact the ‘S’ in ESG.
