Sustainability
SIMCo evaluates the sustainability profile of assets at each stage of the investment process using our proprietary ESG framework and scoring methodology, and we proactively engage with our stakeholders on sustainability matters, which we have summarised below. For each fund’s own sustainability policy, reporting and regulatory disclosures, please visit the respective fund websites.
Integration into the investment process
Positive screening is employed to take a more favourable view on companies that fall within one of our three sustainability themes:
- Renewable energy
- Enabling the transition to a lower carbon world
- Infrastructure with social benefits
Negative screening is applied to each potential new investment, precluding funds from investing in certain harmful, risky or controversial sectors:
- Upstream infrastructure related to the exploration of oil and gas
- Thermal coal mining and directly related infrastructure
- Power generation from coal
- Permanent military infrastructure for active operational forces or military production
The SIMCo team gather and analyse due diligence materials, such as environmental assessments, technical reports, and internal policies. Any material or emerging sustainability risks will be identified for review at the Investment Committee meeting and for subsequent monitoring. Further information or a pre-investment sustainability questionnaire may be requested in order to more fully understand the company’s sustainability risks and opportunities.
The asset is assigned an unmodified E score and then a preliminary ESG score is calculated according to our scoring methodology. This gets assessed in the context of the overall portfolios and investment objectives of the fund and is presented in the final credit memorandum, alongside a commentary describing the scoring rationale and any notable sustainability risks.
We firmly believe that the quality of a borrower’s governance influences the risk of lending to it and the likelihood of full and successful repayment. As such, the credit and sustainability teams carry out rigorous due diligence and assessment for good governance at the companies we lend to.
As part of our investment analysis, we will, where relevant and possible, also assess the consequences of different climate change scenarios for our investments. We obtain relevant data from borrowers and third-party providers where primary data is unavailable and continue to evolve this kind of analysis.
Our IC approves or modifies the ESG score and discusses any material sustainability risks or opportunities for the asset. Where appropriate and possible depending on the type of deal, ESG-related covenants may be embedded into loan documentation.
We formally monitor each investment semi-annually as standard. As part of the monitoring, the IC reviews the investment’s ESG score and any emerging risks or changes that may have occurred. The IC formally reconfirms or updates the scoring based on its review. All borrowers are also sent an annual sustainability questionnaire and engaged with over the course of the year on key sustainability risks, opportunities and topics.
The sustainability profiles of investments are considered when discussing portfolio restructuring and disposals. Companies with a low or deteriorating ESG score may be looked at for disposal, whilst decisions are made taking account of financial metrics.
Engagement
We deploy a range of engagement strategies designed to encourage and promote sustainable behaviour in portfolio companies, some of which are described below. On occasion and where viable, some of our engagements may be collaborative with other stakeholders or lenders on the deal. If the borrower is unwilling to engage, we may deploy an escalation strategy that could include looking to dispose of the loan. Lenders do not, as a matter of course, have voting rights in the companies they lend to, so this engagement strategy is rarely applicable to SIMCo.
We believe loan terms can be a powerful lever to drive positive impact and behaviour at our borrowing companies with tangible, real-world outcomes. So, where appropriate and possible, we may seek to include covenants or repeated representations to ensure that the borrower complies with its stated sustainability objectives and to encourage it to improve its standards over time.
These could include, for example, obligations to: meet predefined targets; disclose data or enhanced reporting, such as completing our annual ESG questionnaire; or adopt, continue or enhance environmental, social or governance policies.
We ask borrowers to complete our annual sustainability questionnaire, which includes questions on the borrower’s overall ESG policies, procedures, progress and oversight, as well as details on specific areas of E (e.g. carbon-reduction initiatives), S (e.g. complaints processes) and G (e.g. internal audit function). There are a range of quantifiable ESG metrics also covered, such as CO2 emissions, health and safety records, and Board independence.
We seek to maintain a direct dialogue with the management teams of borrowers, or the sponsor where applicable, to discuss sustainability risks and performance and as part of our ongoing monitoring.
We also devise sustainability action plans for assets that identify areas for potential improvement in the borrower’s sustainability credentials, which may form the basis of engagement.
Membership
The UN Principles for Responsible Investment (PRI)
UK Sustainable Investment and Finance Association (UK SIF)
TNFD Forum
SFDR
