Originally Appeared in PEI Infrastructure Investor, November 2020
ESG implications are changing infrastructure development and investing, stakeholder engagement and how we define purpose beyond returns, says InstarAGF chief operating officer and senior vice-president Sarah Borg-Olivier.
CRISES ARE CRISES because they deeply affect people, who bear the impact and responsibility of managing them and, in so doing, hold the key to outcomes. Crises are unfamiliar and unpredictable: they shake, challenge, confirm and shape our cultural values and our individual and national psyches; they scar us, yet can help to heal and drive change; and they reveal where trust is lacking but also where sources of unity and purpose can be found or fostered.
Covid-19 is accelerating a profound ideological shift in how we think about the role of business in society, a transformation that has been slowly taking form in recent years. In 2019, the Business Roundtable, which includes the CEOs of the largest corporations in North America, publicly reframed the purpose of business and corporations as stakeholder value, not solely value for investors. The pandemic amplifies the notion that responsible capitalism requires stakeholder interests to be balanced with those of capital providers, bringing a more acute focus to corporate conduct and how organisations treat people and share value more broadly within the community.
WE HAVE HISTORICALLY UNDERESTIMATED THE URGENCY, SCALE AND BREADTH OF ESG RESPONSES NECESSARY TO MEET THE MOMENT BEFORE US.
We have historically underestimated the urgency, scale and breadth of the environmental, social and governance responses necessary to meet the moment before us, which appears now in sharp relief. The pandemic painfully underlines the consequences of slow action on biodiversity and climate change, human capital, and social and economic equality. As we confront the greatest challenges many of us will experience in our lifetimes, the infrastructure investment community has a unique opportunity to build back better.
Investment in quality infrastructure accelerates economic growth in North America at a rate of 1.7 times while reducing inequality and elevating quality of life. Put simply, our sector has a great responsibility to enable the conditions for long-term sustainability.
This pandemic, like others before it, will undoubtedly spur innovation at a scale proportionate to how it is altering our world. In an uncertain environment characterised by rapid change, imperfect information, financial challenges and competing needs, leaders face difficult decisions in the present and for the potential future.
Extraordinary creativity and fortitude are needed to overcome the socio-economic fallout and broaden new business strategies that energise, rather than erode, ESG goals. There are five paths to long-term sustainability and resilience emerging for infrastructure investors and, in turn, the communities we have been trusted to serve.
The starting point for real action on ESG in fundamentally about governance decisions, or ‘GSE’: building the platform, initiatives and incentives to effect true social and environmental change rather than focusing on rankings and ratings.
Investors have most typically used ESG factors in the context of a qualitative assessment or screening rather than embedding them in the financial model for an investment. While the exercise is not without challenges, integrating ESG fully within investment strategies and overall reporting can contribute to a deeper understanding of the ‘why’ beyond the ‘what’ on ESG matters and how ESG outcomes are linked to corporate performance, including how goals and commitments align to overall strategy and value creation. Understanding and explaining how ESG-related activities drive investments and generate returns leads to accountability, ownership and new ways of thinking about opportunity and partnership.
Publicly sharing our ESG practices, even when it is not required, and bringing substance, not merely metrics, to the conversation instils stewardship and the foundation of transparency and trust for investors, customers and employees that is central to achieving long-term sustainability. It is about articulating a purpose beyond numbers and expressing and demonstrating our values in the pursuit of that purpose.
Evidence is mounting that many of the same human activities that contribute to climate change are also factors in the emergence of new diseases such as covid-19 and in increasing their lethality. Environmental degradation is deeply entwined with poverty, health outcomes and the quality of opportunity available to citizens. It is also exacerbated by dysfunctional governance internationally that compromises our ability to find the common good.
In 2018, the Intergovernmental Panel on Climate Change suggested that global warming must not exceed 1.5 deg C – less than the 2 percent agreed by signatories to the Paris Climate Agreement – to limit the intensity and frequency of extreme climate events and scarcity impacts on resources, ecosystems, biodiversity, food security and cities to merely moderate levels. According to the IPCC, achieving this target will entail a shift to net-zero emissions across the world by 2050.
OUR INFRASTRUCTURE CAN EITHER FACILITATE OR CONSTRAIN OUR ABILITY TO MEET THE GREATEST ENVIRONMENTAL AND ECONOMIC TESTS OF OUR TIMES.
This crisis must strengthen the resolve within our investment community to reduce pollution and act more decisively on decarbonisation by modernising or building better, greener infrastructure, which is a vital pathway – both directly and indirectly – to achieving net-zero emissions. Our infrastructure can either facilitate or constrain our ability to meet the greatest environmental and economic tests of our times.
Infrastructure is a long-term investment and environmental risks, including those resulting from climate change, pose great challenges to our sector’s future. Collaboration on climate change across sectors, geographies, regulators and market participants, including leadership and advocacy from infrastructure investors and developers, is critical to mitigating our common vulnerabilities and reversing the inertia of ‘business as usual’.
The rapid digital transformation ‘fast tracked’ by the pandemic has had a sweeping effect, forcing companies to recalibrate operating practices, introduce new collaboration technologies and rethink what is ‘normal’. The infrastructure sector has historically been slow to fully embrace new technology, owing in part to how the speed of technological obsolescence is often at odds with the long-duration nature of infrastructure. Many companies have traditionally lacked a catalyst or the urgency to take risks on new technologies and business models to ensure their longevity.
The pandemic is proving how digitisation affects our ability to acclimatise, prepare and succeed in an increasingly complex economic, environmental and social landscape. Investments in digital technology are critical to innovation, productivity and economic growth. The infrastructure of the future must be ready for it with systems that can be readily adapted, repurposed or retired as technology changes.
Covid-19 impels us to reflect on the challenges that existed before this crisis and to apply these insights to address our infrastructure deficit. Digitising our critical infrastructure makes it smarter and more adaptable and extends its longevity.
More connected technologies provide visibility into infrastructure performance and resource usage, which supports greater efficiency, conservation and greener outcomes. Technology adoption holds the key to balancing competing infrastructure needs, maintenance backlogs and modernisation imperatives with sustainability priorities.
Studies show that better-quality infrastructure enhances connectivity and economic opportunity and therefore profoundly impacts human capital through better health and education outcomes. Yet conventional approaches to infrastructure development have often been at odds with a community’s socioeconomic aspirations and needs.
The pandemic starkly demonstrates the material value of the health and contributions of myriad stakeholders to our sector’s success and how excelling on the S in ESG will determine our ability to cope, manage and overcome this crisis.
IF THE SINGLE BEST PREDICTOR OF HUMAN RESILIENCE IS THE SUPPORT OF OTHERS, IT IS CLEAR THAT INACTION ON S FACTORS IS COSTLY AND COUNTERPRODUCTIVE TO SUSTAINED, INCLUSIVE ECONOMIC GROWTH.
If the single best predictor of human resilience is the support of others, it is clear that inaction on S factors is costly and counterproductive to sustained, inclusive economic growth. Organisations and societies with well-established human capital frameworks, where personal health, well-being and resilience are prioritised, have greater aptitude and scope to create and diffuse long-term value. Infrastructure is fundamentally about people, with the capacity to bring us closer together and create new hubs of social and economic progress.
Perhaps the most important lesson from this crisis is that intentionally investing in and prioritising a strong culture is what equips organisations and communities to bridge to new opportunities and withstand long-term demands and threats.
As humanity faces its greatest test in a century, diversity and inclusion make an organisation more relevant to its many equally diverse stakeholders, more balanced and capable, more adaptable to the future, and more thoughtful on matters of equality and empowerment.
Diversity and inclusion must be actively and deeply ingrained in our way of life if we are to be more creative, agile and resilient. More must be done to create an environment of equality and opportunity in business, our public institutions and government, and our communities for all people regardless of their race or ethnicity, gender, sexuality, age, ability, socio-economic status, religion, or other marker of identity.
AT ITS CORE, INVESTING IN INFRASTRUCTURE IS ABOUT INVESTING IN PEOPLE AND RESPECT FOR ALL STAKEHOLDERS.
Diversity is a moral and business imperative that matters profoundly to purpose, potential and performance. In looking to the future of infrastructure development and what sustainability truly means, diversity and inclusion are central to how we must conceive, plan, partner and develop more citizen-centric and informed infrastructure that aligns with the needs and goals of communities and customers. At its core, investing in infrastructure is about investing in people and respect for all stakeholders.
By following these five pathways, we can map a new social contract for the infrastructure sector that reimagines the future instead of turning back to our old trajectory.
We will be tested in the months and years ahead to strengthen ESG practices, elevate corporate citizenship and articulate a larger defining purpose for our organisations beyond returns to investors.
While much remains uncertain, the pandemic clearly reveals how interconnected we all are despite our differences. That is the value, lesson and power of community as we plot a new path towards tomorrow.