Read this article to understand:
- The concepts of a social licence to operate and shared value
- The role asset managers can play in creating shared value for all stakeholders
- Key principles of best practice to earn a social licence to operate
Pursuing investment performance in a way that does not undermine society and the economy has become an imperative for asset managers for two reasons. Many of the world’s problems, from income inequality to climate change, are so far-reaching that solutions require the expertise and scalable business models of the private sector. At the same time, the legitimacy of business has been called into question, with companies including asset managers seen as prospering at the expense of broader society.1
Partly because of this, but also as the sustainable business movement has grown, stakeholder capitalism has seen a resurgence, reflected in environmental, social and governance (ESG) principles. But for investors in real assets, the manifestation of ESG risks is primarily an impact on people. Learning who those people are, how they might be impacted by your activities, and what you need to do differently as a result is how asset managers can create and maintain a social licence to operate (SLO).
“An SLO is the ongoing acceptance of a company or industry's standard business practices and operating procedures by stakeholders, including employees, suppliers, customers, communities or society at large,” says Emily Day, responsible investment associate at Aviva Investors, on secondment from consultancy Hatch. “It is created slowly, as a company builds trust with the community it operates in and other stakeholders, and maintained over time.”
Nowhere is this more relevant than for direct investors in private companies and assets. It is impossible to grow a company or create a successful place without a licence to operate. As the owner of a company or asset, an asset manager has employees and suppliers and is enmeshed within communities. The successful management of those relationships will bring benefits to those stakeholders as well as potential financial success to clients. For instance, the owner has a role to play in halting detrimental business behaviours in the supply chain by setting standards suppliers must adhere to in terms of living wages, labour standards and human rights.
In line with the Financial Reporting Council’s Stewardship Code, this dovetails with fiduciary duty, which dictates that those entrusted with deploying money into the markets must consider the needs of their stakeholders.
“Driving for profits through companies or projects whose activities are detrimental to the health of suppliers and communities undermines the financial system and should be seen as a market failure,” says Edward Vaughan Dixon, head of responsible investment, real assets, at Aviva Investors.
An asset manager striving to build and maintain an SLO should therefore develop and manage projects with an aim to create shared value, which “results from policies and practices that contribute to competitive advantage while strengthening the communities in which a company operates”.2
That means creating profitable developments while delivering social value to local stakeholders. In this article, we explore the key components of social value, what it means for asset managers and direct investors aiming to earn an SLO and generate long-term investment returns, and we discuss principles of good practice.
What this means for asset managers
To earn an SLO and deliver shared value, communication is the most important factor. A 2016 Harvard Business Review article lists five elements necessary to achieve shared value, including a common agenda, shared measurement system and constant communication.10
“A lot of investment managers are quite good when it comes to setting a strategy on what they'd like to achieve, but we also need to create partnerships to make that happen,” says Day.
Dixon adds asset managers can support the delivery of social value by engaging their portfolio companies to build skills and capacity, particularly during the early stages where embedding a focus on stakeholders can help a business grow sustainably. They should also manage design teams to set a clear brief for social design features to be integrated into development and refurbishment projects; and manage developers and construction contractors, setting out contractual deliverables to go over and above planning compliance.
“It is important to connect different parts of the supply-chain ecosystem with each other, for example connecting suppliers with people looking for job opportunities and connecting occupiers with the communities they operate in,” he says. “In 2023, we established a social value steering group for London to facilitate the growth of a network of employment needs and opportunities for fair and inclusive work in construction. The group support us to help fulfil our main contractors’ social value targets for real estate developments in London.”
Sarah Forster, co-founder and CEO at The Good Economy, says building a network of trust – as well as knowledge – between investors and local authorities is essential.
“Most investors don’t fully understand the planning system, how decisions get made and some of the problems that arise,” she says. “Similarly, local authorities need to understand how to package local development projects as investable propositions. And investors and authorities should be actively engaged in the procurement decisions around developers to ensure local needs are met.”
Figure 2: Stakeholder alignment and collaboration are key
Source: The Good Economy, 2023.
Morgan adds asset managers should engage with communities as early as possible. If the local authority can see there has been a process of engagement that has garnered local support for a project, it will reduce the risk when requesting planning permission.
“Community engagement increases trust, not just with the residents but with the local authority,” he says. “And it provides better outcomes because that local knowledge and voice will ultimately help deliver on local need.”
Dixon adds it is important to consider the broader area that will be impacted by a development or ongoing management of an asset. That can be achieved by working in partnership with local authorities, landowners or housing associations, all of which have a stake in the community.
“You have to be taking that long-term view with them, otherwise you're not going to be a good partner,” says Morgan. “Engagement continues and should go through to post-occupancy. It is key to learning what works and what doesn't, and to maintaining that contact with local people.”
Working with stakeholders can help avoid unintended consequences
Working with stakeholders and robust evidence can help avoid unintended consequences like planting trees that worsen local children’s hay fever or having people benefit from an affordable housing scheme who then let out the property and profit doubly.
“Sometimes, having ticked the box in their social value framework, people assume it is delivered without checking the outcomes are what they expect or what the community actually wanted,” says Dr Margarethe Theseira, head of UK consulting at Buro Happold.
She adds regular engagement needs to be maintained because a development will often create new communities that will have to integrate with the residents already living in the area, and because people will move in and out of development agencies, so the initial view may not survive the change in the staff delivering it.
And it is essential to maintaining an SLO.
“With stop-start consultations that are patchy and don’t build on one another, the community get annoyed they don’t get feedback,” says Samuel. “Whereas all the research points to the fact that, if you make something people feel invested in, they take care of it, so it makes the long-term job as asset managers much easier.”
The impact on returns
It therefore doesn’t have to be a question of prioritising social value over profits – or vice-versa.
Firstly, taking a shared value approach can enable asset managers to develop sites that are fit-for-purpose, resilient and adaptable to changing requirements, and not necessarily for a higher cost.
“It is site-specific and dependent on what you are trying to achieve. But if you involve the community early on in helping to define the solutions and not just challenges, you will often find they can do it in a cost-effective way,” says Theseira.
Places with features that appeal to residents tend to dovetail with quality and efficiency
Secondly, places with features that appeal to residents tend to dovetail with quality and efficiency, as well as climate resilience and sustainability. That makes them more valuable, particularly in the long run, and mitigates the risk of the assets becoming stranded as environmental regulations become more stringent.
“We're talking about creating places that are better for people in the long term,” says Morgan. “Those places tend to be better for the planet, in that they are more resilient in terms of the climate emergency, and tend to be more valuable.”
For asset managers, this should be considered part of meeting their fiduciary duty. It can help boost their reputation and make them more competitive when bidding for projects, securing the best suppliers and investing in target companies. Going beyond this, investing to help suppliers be more resilient, for example, improves the supply-chain ecosystem for everyone. That delivers true shared value.
“We can ask whether a project or initiative will lead to us being more competitive against our peers or if it will enhance our reputation,” says Dixon. “Will it also lead to a stronger supply chain or skills and capacity building in a particular group or segment of society? If it is the latter, this is what we would consider to be good stewardship or shared value – contributing to building a more stable financial system whilst delivering returns today.”
Delivering social value
For the various stakeholders involved in developing or redeveloping buildings and places, delivering social value means creating places based on people’s health and wellbeing, says Matthew Morgan, co-founder and director at Quality of Life Foundation.
“Having a decent, affordable home that is part of a safe, healthy neighbourhood is the foundation of having a happy and healthy life,” he says. “A lot of places in this country do not deliver on those, and they lock in poor travel opportunities, not enough green space, a lack of social infrastructure. That is what we are seeking to address.”
Different frameworks exist to help developers define and deliver social value. The Quality of Life Foundation has developed one such framework around six areas of wellbeing: a sense of control, health equity, connection to nature, getting around, a sense of wonder and local community.3
“Our concept of quality of life is health, wellbeing and social value. It encompasses elements of the hard stuff of urban planning, like green spaces or buildings,” says Morgan. “It also incorporates the soft stuff that's important but sometimes overlooked, like a person's sense of agency over decisions affecting their area, or the sense of community engendered by feeling part of where you live.”
Morgan says the framework is a practical tool that can form the basis of conversations when engaging with a community, but also a way of organising data to measure impact and a guide so community feedback and data inform design decisions.
Dr Jamie Anderson, urban wellbeing lead at engineering consultancy Buro Happold and research fellow at University of Manchester (UoM), adds it is essential to measure both objective and subjective wellbeing to understand the impact of a development on its stakeholders. Together, the company and university often use the UK Government Office for Science's “five ways to wellbeing”, an evidence-based framework that can be used to link a local area to key activities associated with mental health and subjective wellbeing. These are: connecting with others (or social interaction), physical activity, opportunities for mindfulness, learning opportunities and altruism.4
“Subjective wellbeing is about unapologetically measuring subjective human experience, which can be very different from objective measures,” says Anderson. “For example, a person or a community's experience of safety might be altogether different from objective measures like local traffic accident and crime rates.
“Built-environment professionals can use subjective wellbeing and five-ways measures to assess how their design supports – or thwarts – wellbeing across age groups, sexes and all the different backgrounds of community members,” he adds.5,6
Referencing a recent Buro Happold and UoM project at Brent Cross Town, working with a joint venture between Related Argent and Barnett Council, Anderson says they engaged with the community and multiple stakeholders to design public spaces that support high-wellbeing , or flourishing. The project also measures subjective wellbeing and the five ways in a robust manner.
“We are doing this with the community, so it’s not top-down,” he says. “Whether results are positive or negative, crucially, the joint venture partners are doing it with people and making use of that data to influence future design and the ‘softer’ side of things, like what kind of local community events and training should be prioritised.”
Place-based impact
In her book Housing for Hope and Wellbeing, Flora Samuel, architect and professor of architecture at the University of Cambridge, looks to define and map the wellbeing dimension of social value, including factors such as community, connection with nature and autonomy, and explores how housing contributes to it.7 In her approach, she calls for investors and developers to consider broader impacts.
“Local development plans have to ask for social, environmental and economic value, and investors should be investing on the basis of these dimensions of value,” she says. “They need to chart and spatialise them, and the buildings need to be procured based on the value they deliver. Then, post-occupancy evaluation (POE) needs to capture the development of that value asset management going forward.”
She advocates an evidence- and map-based planning system able to capture social value across its multiple dimensions.
“I believe social value has to be mapped because it's highly contextual,” she says. “You need to see with great specificity where the value is being created. For a project we are conducting in Anglesey, where the children are the most obese in Wales, we found kids weren't going to the playground in a certain area because the parents didn't have a bench to sit on. It's these small things we need to capture, especially as we think about climate change, adaptation and resilience. It’s about using money more intelligently and specifically.”
The Good Economy, a social impact advisory firm, takes a similar, place-based approach for investors wanting to make a material difference locally.8
Figure 1: Place-based impact investing conceptual model
The architecture of place-based impact investing
Source: The Good Economy, 2023.
“Impact is felt in places,” says Mark Hepworth, co-founder and director of research and policy at The Good Economy. “A place-based approach gives you much more understanding and control. You can see who you are trying to help.”
The Good Economy’s 3E model helps investors map out where to invest along three areas:
Even asset managers whose strategies do not meet all the criteria required to be labelled as “impact” funds can follow those principles to map out where they are investing to deliver social impact.
“The 3E goal framework offers a societal-level perspective on place-based impact investing. From our experience, it resonates closely with the strategic objectives of local stakeholders and impact-seeking investors,” says Hepworth. “In combination, the framework and conceptual seven-pillar model can provide investors, local stakeholders and other sectors with a roadmap for designing and aligning strategies based on the core principle of shared social impact creation.”
Dixon argues the key elements asset managers should consider when investing in a development are employment, skills and training; education; investment in the community; and investment in social features and public spaces, such as amenities and common areas for socialising.
“Creating access to employment, skills and training requires a commitment to developing meaningful partnerships with your supply chain and communities. This is the only way to start to create employment opportunities for individuals who face the most significant barriers to accessing them. It takes time and focus,” he says.
Education focuses on encouraging local young people to make informed decisions about their career and industry pathways, while community investment involves supporting the local community by dedicating time, money or resources in kind to environmental and social projects.