Over the past year, we have seen increasing pressure on government – and through governments – to prioritize infrastructure investments that deliver greater social and environmental benefit; simply put, to become more responsible leaders.
Governments are being asked to account for the social and environmental value of their investments and public opinion has drawn the spotlight onto social inequality (as evidenced by recent election and referendum results).
Institutional investors are recognizing that their returns are also under pressure from social and environmental concerns (witness the debates about pipelines in the US or coal fired power plants in India). The beneficiaries of the bigger public pension plans are starting to ask searching questions about the social and environmental benefits of their investments. Some, like CalPERS and CalSTRS have begun to create policies to help their deal-makers measure social and environmental impact alongside financial return.
To be clear, this is not about ‘impact investing’ where financial returns might be sacrificed in the pursuit of social benefit. This is about measuring and assessing the wider basket of benefits that an investment delivers beyond purely financial returns.
Over the coming year, we expect investors (public and private) to make serious efforts to measure and communicate the real impact of their investments. In some cases, this will lead to difficult choices as plan managers and their beneficiaries gain greater awareness of their social and environmental footprint. It will also likely lead to growing competition for projects that are able to demonstrate stronger social and environmental benefit.
In the short-term, however, the challenge for investors and governments will be in formulating a consistent and appropriate approach to measuring and reporting on social and environmental impacts, a discipline that is currently at a relatively early stage of development.
In the medium term, we expect some confusion as different players and markets test different approaches to creating a clear, comprehensive and workable set of measures. However, once institutional investors and governments start reporting on social and environmental benefits using a generally-accepted set of measures, the pressure to deliver even greater benefits will start to rise. And as measurement and reporting becomes more sophisticated, we expect investors to move towards achieving a true ‘triple bottom line’.
However, further recessions and bear markets may complicate matters as governments are forced to focus on investment for economic growth, and for institutional investors the fiduciary imperative to provide for the beneficiaries’ retirements comes under pressure.