Every year for the last nine years, SWEN Capital Partners has conducted an ESG data collection campaign. In 2021, this campaign was an opportunity to interview more than 200 GPs among its investment universe, including almost 30 GPs specialised in infrastructure, mainly located in Europe.
This annual data collection campaign helps us better understand the dynamics of ESG performance of GPs on five main topics: ESG policy, ESG in pre-investment phase, ESG in monitoring and exit stages, ESG transparency & communication, and climate.
According to the scoring methodology we’ve defined, the results of the survey have shown that ESG has become a mainstream consideration for infrastructure investors.
However, it has also shown that most of the actors still underperform in terms of climate commitment. The performance recorded on each criterion is at least 80 percent, except for climate commitment where the performance is below 70 percent.
Despite this lateness, infrastructure investors benefit from the industry trend of addressing climate challenges through collaborative initiatives such as the Initiative Climat International (iC International), a private equity collaborative action created in 2015 during COP21.
This group gathers private equity actors working on guidelines and tools to help management companies better understand and manage climate issues related to the activities of their investee companies.
Other initiatives, such as the Science-Based Targets (SBT), aim to provide companies (and their investors) with guidelines for a low-carbon future. These collaborative initiatives, among others, are all supporting a transition to a low-carbon world through finance and will be an important resource for infrastructure investors to support their investments in the reduction of their carbon footprint and climate risks management.
What are the main climate risks to address for infrastructure investors? The risks related to climate are numerous for infrastructure investors. Indeed, because of the nature of their investments, infrastructure investors may be highly exposed to physical climate risks.
The Taskforce on Climate-related Financial Disclosures includes, under physical climate risks, both the impacts from specific events (acute risks) like hurricanes or floods, and those emerging more slowly from longer-term changes (chronic risks) like changes in temperature and precipitation leading to drought, land degradation and sea level rise.
Other climate risks can be categorised as transition risks, including all the risks a company is exposed to – legal risks, technological risks, market risks, reputational risks – in an economy transitioning to low carbon.
Since 2017, we have implemented a climate strategy that applies both to its direct and indirect investments and is focused on three key pillars.
- Exclusions: among several commitments such as shifting systematically a portion of its investments towards assets aligned with a low-carbon economy, it includes as a first filter an exclusion of coal.
- Transition: beyond strict exclusions, this policy also supports effective transition activities by taking into account commitments from companies and GPs to either implement an action plan to transform all of the coal-related activities towards less polluting energy sources (for example, converting coal-fired power stations into less CO2-intensive assets such as biomass or gas-fired power stations) or to initiate a process of selling said activities within 24 months of the investment. SWEN CP also supports the financing of companies and infrastructure assets that are committed to change their business model to be aligned with a low-carbon future, for example electrifying Norwegian ferry and express boat fleets as part of the country’s Green Shift strategy – thus also creating business growth opportunities.
- Measurement and engagement: annual calculations of carbon footprint for each managed or advised investment portfolio is a key starting point to focus its engagement actions on the highest contributors to this carbon footprint.
Regarding direct investment activities, we systematically conduct a climate due diligence with different steps aiming to cover all the climate risks a company can be exposed to.
Beyond the physical and transition risks mentioned above, this due diligence aims to identify any regulations related to climate that apply to the company’s activity.
This process also includes a systematic verification of whether the activity of the investment opportunity is aligned with the European Taxonomy.
When the Taxonomy Regulation is complete, SWEN CP will also look at whether the activity is Taxonomy-aligned, which means meeting substantial contribution criteria and/or ‘Do No Significant Harm’ criteria related to two climate objectives: climate change mitigation and climate change adaptation (among six other objectives).
An analysis on the value chain of the company is also conducted to identify any potential physical or transition risks to which strategic suppliers and distributors could be exposed to. This value chain analysis also helps better understand the expectations of suppliers and clients on the company’s climate practices.
The risk of substitution of the company’s products and/or services is analysed. This step consists of identifying potential alternative product and/or service, that’s less carbon-intensive, that could substitute the company’s current products and/or services.
A reputational analysis is also conducted on the company and its sector to identify potential climate-related controversies that could have occurred in the past and have an impact on the company’s activity and reputation. In addition, once invested in companies, SWEN CP does follow-up on their exposure to controversies, including on climate issues.
As an illustration, we conducted a climate due diligence on a Norwegian district heating network. Two main physical climate risks had been identified: operational risks due to soil deformation or natural disaster; and volume risk since there could be lower demand for heating due to global warming. Supported by external experts, the due diligence provided a sophisticated modeling analysis of climate change consequences based on different climate scenarios as well as recommendations on how to mitigate these risks.
SWEN CP is also investing in methodologies and tools to measure the global environmental and climate performance of each investment opportunity, both at the due diligence stage and during the holding period, as illustrated by our implementation of the Net Environmental Contribution. The NEC is a unique measure of the environmental impact of business activities through a robust, relevant and easy-to-use framework (based on five criteria: biodiversity, climate, air, water and waste) that is fully in line with the TCFD recommendations.
In addition, the NEC adds significant value to the quality and transparency of PRI reporting and is consistent with the EU’s Sustainable Finance Action Plan. Thus, NEC is a tool for SWEN CP to engage with all its stakeholders.
Our firm also considers climate risks when investing indirectly by assessing, during due diligence, a GP’s ability to support its investments on ESG and climate topics. As SWEN CP aims to support climate transition among the GPs it works with, we typically include a “climate appointment” clause in fund investment side letters that states SWEN CP will meet on a regular basis with the GP to discuss the climate actions taken at the portfolio and GP level, share with them best practices of their peers and compare them with SWEN CP’s infrastructure ESG benchmark.
Isabelle Combarel is deputy CEO and head of development and ESG, and Thibault Richon is managing director, head of infrastructure multistrategy, at SWEN Capital