Welcome to ‘In the Hot Seat’, a fortnightly series where we tackle some of the biggest questions facing sustainability professionals across a range of industries. We’ll also explore what sustainability means and how it is interpreted across different sectors and geographies.
This week, Zara de Belder, Head of Maitland/AMO Sustain, caught up with Michele Giddens, Co-Founder and Co-CEO of Bridges Fund Management. Founded in 2002 by Sir Ronald Cohen, Michele Giddens and Philip Newborough, Bridges Fund Management has raised over £1.2bn to invest in the transition to a more inclusive and sustainable economy.
1. Over the last few years, we have seen private equity move into the impact investing space. What are the main motivations and how does this compare to other asset classes?
In the last few years there’s been an explosion of interest in sustainable and impact investing. According to one industry report, the market grew by 42% — from $502 billion in AUM to $715 billion – between 2019 and 2020 alone. I think there are three main reasons for this.
First, the urgency of finding better solutions to the global challenges we face – from climate change, to healthcare inequalities, to economic exclusion – has become very apparent. The Sustainable Development Goals have been really important in this regard, because they provide a useful framework to help us understand the scale and breadth of these challenges. So there has been more focus on the role business and investment can play in supporting solutions, which will only accelerate post-Covid.
Second, private equity firms are simply responding to the demands of their key clients: their investors. Most big LPs today are not just interested in the IRR their GPs deliver; they want at the very least to understand the impact of their investments, and in some cases, actively contribute to solving these challenges.
Finally and perhaps most importantly, I think private equity firms are moving into impact investing because they recognise not only the moral imperative but also the economic opportunity. We’ve been doing this since 2002, and we’ve always believed that an impact-driven approach is a way to deliver long-term outperformance – because it allows you to invest behind some of the world’s most powerful growth trends, and because it helps to create better relationships with customers, employees and other stakeholders. That creates more valuable, more resilient assets. And I think more people are starting to realise that.
Private equity is well-placed to drive positive impact, because of its highly engaged ownership model. But we’re also seeing huge and growing interest in other areas of impact-driven investment too, notably for us in real estate and social outcomes contracts.
2. As an investor, how are you ensuring your portfolio is climate-resilient and is positively contributing to the net zero agenda?
This is an area we’re really focused on at the moment across the Bridges platform. Assessing, monitoring and reporting on climate risks is now a central part of our impact management methodology – and it’s becoming an increasingly important part of our value creation process.
Take our property funds for example. Existing buildings and new developments are a big contributor to carbon emissions in the UK, so this is a really signifi cant issue for the sector.
The first aspect is reducing carbon impacts during construction. So we actively engage with the whole supply chain to minimise emissions during the build, using recycled materials wherever possible.
We also conduct ‘adaptation to climate change’ assessments on all our new development sites, as part of the BREEAM accreditation process. This involves looking at how the property might be affected by issues like flooding, extreme weather, drought, subsidence and so on. We can then potentially make allowances for these risks in our model.
The other critical aspect is reducing operational energy usage, through better insulation, LED lighting, heat pumps, intelligent controls and so on. We use renewable energy wherever possible, and then offset any remaining emissions.
For instance, we’re currently building an urban logistics site in Oxfordshire that we hope will be a net-zero development, targeting BREEAM ‘Excellent’ and EPC A+. It will have a carbon neutral cladding envelope, 100% of its energy from renewable sources, (including solar panels on the roofs), LED lighting, low or VOC-free paint, even electric car charging spaces.
And what we’re increasingly finding is that these measures don’t just mitigate risk – they also allow us to create resilient, future-proofed assets that are more attractive to institutional buyers when we come to exit.
3. Globally, there are many impact investors who are all prioritising different impact objectives which can make standardisation challenging. How can the industry achieve better agreement on what impact is and how to measure it?
This is a really important question. As a sector, we need to move away from investors competing over who has the best impact measurement methodology. It’s confusing for everyone, and makes it even harder to tackle these big challenges. Without common definitions and standards, there’s no way that all these different players can work together towards the same impact goals. And there’s no way that investors can compare impact performance – so they can distinguish genuine impact from ‘impact-washing’.
That’s why since 2016 Bridges has been supporting (and hosting) an initiative called the Impact Management Project, which is a sector-wide forum to build global consensus on how to measure, manage and report on sustainability and impact.
The IMP began by bringing together over 2,000 organisations to agree some shared norms and definitions – including the five dimensions of impact, which Bridges and a number of other firms in this space now use to analyse and report on the impact of our investments. Since then, the IMP has been facilitating the ‘Structured Network’ – a collaboration between 16 of the world’s leading standard-setters, including UN agencies, the OECD, and leading corporate reporting initiatives – with a view to agreeing an overall system of standards for managing and disclosing impacts. A critical part of this is corporate disclosure; and here the Structured Network seems to be making real progress towards a global solution, working with the IFRS Foundation.
This might sound a bit technical and abstract. But it’s absolutely vital, just as the introduction of generally accepted accounting principles was vital for the development of the capital markets as we know them. Unless we can agree these common definitions and standards, it will be much harder to unlock the capital and the collaboration we need to solve these huge challenges.
4. If you had one piece of advice for someone considering a career in responsible investment, what would it be?
Don’t think about it too narrowly.
As this sector grows in size and sophistication, there’s an ever-increasing number of career opportunities opening up to people who want to make a positive impact through their work. If I think only about the Bridges platform, in addition to our private equity strategy we also have two other investment strategies, property and social outcomes contracts. But we also rely on our inhouse impact management experts, who help us understand how impact initiatives can create value.
And like everyone else in this sector, we rely on financial and legal experts to create the funding and contract structures we need to invest our capital as efficiently and effectively as possible. Then more broadly, as a sector we need to get better at storytelling, at campaigning, at influencing policymakers.
So we need people in this sector with a variety of skills and talents.
The other important aspect of this is that there’s an ever-broader range of organisations who are thinking about sustainability and impact. Obviously there are specialists like Bridges, who focus solely on this area. But more and more mainstream organisations – both within the financial sector and elsewhere – are thinking about how they can use their capital more responsibly and sustainably.
So you may find interesting opportunities in areas where they wouldn’t have existed five or ten years ago.
The critical point is to think about how and where you can use the skills you have to make the biggest impact.
5. Finally, what does sustainability mean to you?
To me, a commitment to sustainability is about wanting to create a better future for people and the planet – but also recognising that we need to act now and act decisively to have any hope of achieving that. Today, the risk of catastrophic climate change is still rising, the human race uses about 1.75 times as many natural resources as the Earth can replenish every year, and billions of people are excluded from economic opportunity. That cannot be a recipe for long-term stability or prosperity. So building a more sustainable economy – where we reduce our impact on the planet, while helping more people to fulfil their potential – feels to me like the only way to secure our future.
About the Author
Also by this Author
- Maitland/AMO Sustain – In the Hot Seat with Michele Giddens, Co-Founder and Co-CEO of Bridges Fund Management
- Maitland/AMO Sustain – In the Hot Seat with Jovana Stopic, ESG Manager at IK Investment Partners (‘IK’)
- Maitland/AMO Sustain – In the Hot Seat with James Alexander, Chief Executive at The UK Sustainable Investment and Finance Association (UKSIF)
- Maitland/AMO Sustain – In the Hot Seat with Kensey Biggs, Senior Vice President, ESG and Corporate Social Responsibility at Truist
- Maitland/AMO Sustain – In the Hot Seat with Lisa Beauvilain, Head of Sustainability & ESG at Impax Asset Management