Primary tabs

Navigating reputational risks in a golden age of sustainable investment | Blog

By Matthew Jervois, Alumni, Cambridge University’s Institute for Sustainability Leadership

Follow Matthew on Twitter @MatthewJervois

In times of crisis the time-honoured way to lift economies is to fund infrastructure investment and to create a multiplier effect from the subsequent economic boost; witness the New Deal in the 1930’s, and the huge rebuilding that followed WWII. Post COVID, the need to stimulate investment and generate the multiplier effect is just as critical as ever and obviously it’s a vote winner.

In research published by GIIA/Ipsos Mori in 2020, 79% of citizens across 27 countries agreed that investment in infrastructure will create new jobs and boost the economy, and 68% believe Government should prioritise infrastructure investment as part of the Covid-19 economic recovery.  The US has set out spending worth USD 2.25 trillion to modernise its infrastructure and reverse six decades of under-investment, while the EU has pledged Euros 750 billion through its Next Generation EU programme. Though critical questions remain about the private sector’s global role in fulfilling this huge programme of new sustainable infrastructure investment and renewal, both in the developed and developing world.

"Crises and deadlocks when they occur have at least this advantage, that they force us to think." Jawarlahal Nehru, the first Prime Minister of India said: He wasn’t wrong. The COVID crisis has forced the corporate world to think, evaluate and to act even more quickly. This has brought  into sharper focus the range of audiences that drive the success and reputation of business.

Infrastructure operators and owners need to understand the environmental, social and governance risks that impact investors, the planet and society as a whole. Infrastructure is a broad church - transport (roads, railways, ports and airports), communication (towers, fibre and data centres), utilities, energy, as well as social infrastructure (schools, hospitals, prisons). Globally the environmental impact is huge - buildings and construction together account for nearly 39% of energy-related carbon dioxide (CO2) emissions, according to the UN Emissions Gap Report in 2020 (1). In particular, the transport sector has contributed to around 14 per cent of global GHG emissions on average over the last decade. Not to mention the impact of cement production of emissions which is estimated to be 8%.

From an operational and organisational perspective, this has massive implications for the infrastructure industry and poses fundamental questions with key reputational implications: What is sustainable and can it be verifiable? What is the sustainable life of an asset in the context of the race towards Net Zero? What should we do to support otherwise stranded assets before they can be replaced?

The environment has long been the focal point and the Biden effect in re-joining the Paris climate agreement has accentuated this focus, though the reputational risks of infrastructure investing are wider. A business’s supply chain in which a lack of transparency could see an investor inadvertently financing fossil fuel development, endangering indigenous communities or impacting human rights. The ILO estimates that 25 million people are in forced labour worldwide (2); whilst the societal impact can mean the devastation of local economies and rural communities, and lack of progression in gender and ethnic diversity.

The transition to a low-carbon economy does not come without trade-offs. Sometimes there will be conflicting priorities in risk management, hence the rise in importance of ESG to investors and the latest addition to the C-Suite - the Chief Sustainability Officer – whose role involves  deciphering the complex nature of an ESG investment strategy in business structures to ensure companies deliver on commitments and reporting requirements.

Whilst it’s difficult to put a numerical value on sustainable investment growth, the McKinsey Global Institute and the Canadian Pension Plan Investment Board in a report focusing on economic impact of short termism, cited that 47% of companies who took a long-term view created higher revenue, more jobs, lower volatility and better returns for investors (3). This is where the marriage of commercial success and sustainability come together – the  concept of shared value. A notion that ensures businesses can address a social problem, develop a business opportunity and sustain a long-term business model (4).

One of the conundrums for investors is adhering to a set of universally agreed sustainability tools and standards to verify what is a sustainable investment. UN SDGs as an example are more macro-focused at a national government level, and there is yet to be convergence in global sustainability reporting standards, though the IFRS is accelerating this process with an announcement of a new standards board to be made at COP 26.  Irrespective of the need to solve what has been termed the alphabet soup of ESG reporting, the bottom line in ESG in investment terms has come to mean risk management and that should include reputational risk.

Cambridge University’s Institute for Sustainability Leadership, an Institute based on developing solutions for a global sustainable economy, has devised a ten-year plan built on ten interconnected tasks to be developed and delivered by leaders across business, government and finance (5). Their hope is that this will become a compass for a sustainable economy. This approach requires what has become known as systems-level thinking, based on broader engagement and collaboration with different partners. In investment parlance, this implies a more detailed top-down (scenario planning based around international policy changes and socio-economic trends) and bottom-up (a company’s business model and operational and organisational structure and assets) approach.

For infrastructure investors to verify and assess sustainability, it could also mean greater collaboration and partnership with NGOs, like the World Resources Institute, Friends of the Earth on biodiversity issues, or a concept like FAST-Infra (Finance to Accelerate the Sustainable Transition) Infrastructure conceived by HSBC, to help designate a label as proof of sustainable investing in renewable power, green transport, sustainable water and waste and green buildings.

GIIA is well placed to help facilitate greater collaboration between investors and with third parties to help alleviate the reputational risks in a burgeoning asset class. This would play a pivotal role in future economic growth and address many of the effects of climate change and societal issues.