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Infrastructure Investor: Actis: Creating value through sustainability

01 November 2023
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Shami Nissan, Partner and Head of Sustainability at Actis, contributed an opinion piece to Infrastructure Investor. Click here or read below for the full article.


Actis: Creating value through sustainability

Too many businesses treat sustainability as an afterthought, says Actis partner and head of sustainability Shami Nissan.

Sustainability is often still wrongly seen as something to be bolted on to keep investors and other stakeholders happy; a tick-box approach that is considered sufficient to meet regulatory and stakeholder requirements to adopt ESG policies. We disagree.

Instead, we take a completely different approach. We believe that by investing in sectors that provide solutions to global ESG challenges, like sustainable infrastructure, as well as taking an active management approach to embedding such values in our portfolio companies, we are doing more than helping the world meet its sustainability goals. Creating sustainability leaders also adds significant financial value to a portfolio company, throughout the period of our ownership and beyond. We draw on more than 30 years of experience in making these claims.

There are a number of reasons why we hold this view. For one: embedding sustainability is critical to risk mitigation because it prevents value erosion for investors.

Around the world, there are a growing number of ESG risks that can threaten a company’s value, from climate change – such as extreme weather events or shifting long-term weather patterns – to the growing public focus on diversity and inclusion. One of our core skill sets is assessing issues like these during the due diligence process, and subsequently developing mitigation strategies to ensure any potential problems are resolved during our ownership.

Sustainability is also a value creation tool as it offers the potential to access more revenue streams. Assets that have proven and demonstrable ESG characteristics are in higher demand than those that have not, and can therefore achieve the best price.

Hyperscalers – large scale e-commerce, search or cloud computing businesses – will for example only use data centres that have the most robust sustainability credentials in order to meet the demands of their own investors.

A third reason to embrace sustainability is that it can offer wider access to finance and a lower cost of capital. Many lenders will now only fund projects that can demonstrate a strong sustainability profile.

For our part, last year we were able to secure $1.2 billion in impact-linked financing for our Actis Energy 5 fund because we could show the proceeds would be directed only to projects that would deliver social and environmental improvements, and that these improvements could be objectively measured.

What the people want

There are other reasons why sustainability drives increased value. Investing thoughtfully in communities close to our assets is often important to give us a social licence to operate and can help lead to the smoother running of our businesses.

Meanwhile, by taking an ESG view across our whole portfolio, we can drive synergies. Our sustainability and operations teams are constantly working closely with the businesses we invest in to identify efficiencies and other cost-saving opportunities. We are only in business to deliver competitive returns to our investors – losing sight of that priority would not be good business practice.

In addition, taking a strong sustainability approach to our investment principles is increasingly important when it comes to talent acquisition and retention. Many potential employees will only work for businesses that match their own values and ambitions. A commitment to investing in purposeful, sustainable and impactful businesses is, therefore, a critical differentiator for us to ensure we hire the best, most passionate, and most committed employees.

Just as importantly, a higher quality, more sustainable company can command a superior exit price. Sustainability increases the number of potential buyers and leads to greater competition in the sale process, generating outsized returns.

We know this from experience. For example, when we sold Sprng Energy – our Indian renewables platform – to Shell, the company’s high ESG standards were a key factor in the success of the deal.

Meanwhile, during our five-year joint ownership of Lekela – which generates clean energy across Africa – we created a business that became a role model for what a sustainable company should look like on the continent, and which we exited with a significant US dollar uplift despite operating in
crisis-impacted countries such as Egypt and South Africa.

Indeed, the business was rated in the top 1 percent of ESG-rated companies globally by ratings and analytics firm Sustainalytics. The approach we took was critical to achieving a successful exit from the investment.

No going back

A commitment to embedding sustainability is likely to prove even more important in the years ahead, thanks to the rapidly evolving regulatory landscape. There has been a huge increase in regulators’ interest in sustainability in recent years.

There is now an alphabet soup of regulations. In Europe alone we have the EU’s SFDR, its Corporate Sustainability Due Diligence Directive (CSDDD), and the Corporate Sustainability Reporting Directive (CSRD). More broadly, there is also the Task Force on Climate-related Financial Disclosures (TFCD), with the Taskforce on Nature-related Financial Disclosures (TNFD) to come.

Meanwhile, the new International Sustainability Standards Board (ISSB) will make sustainability reporting and auditing mandatory as part of a company’s integrated financial accounting. Natural capital will soon become another strand for investor attention and our experience in Kenya evidences our credentials in this space.

Taken together, this new regulatory environment – not just in the EU but around the world – will force the issue of sustainability deeper into the heart of business decision making. It will move sustainability even further out of the voluntary domain into the regulatory one. Firms that fail to pay the appropriate attention to these changes will create a significant business risk for their investors, employees and other stakeholders.

This new regulatory focus places greater emphasis than ever before on businesses to demonstrate in clear and objective terms the way they are helping the world meet its sustainability challenges. At Actis, we believe our investment approach – which embeds sustainability at the heart of all the businesses we own – has been meeting this goal for years.

Sustainability is important not just to create resilient, sustainable societies, it is also critical to delivering financial value for our investors. Thanks to our decades of experience operating in some of the fastest growing economies in the world, we believe that by creating more sustainable companies, we are able to best deliver the returns our own investors require.

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