PfP Capital - Langham Hall ESG Report

ESG

Understanding its
role for alternative
assets

Contents

1. STATE OF PLAY 4

2. FUNDRAISING 5

3. PORTFOLIO CONSIDERATIONS 8

4. REGULATIONS 12

5. INDUSTRY INTERVIEWS WITH IMPAX AND PFP CAPITAL 15

About Langham Hall

Langham Hall is a partner-led professional service business established in 2006. At
Langham Hall, we aim to be the most professional global provider of administration
and AIFMD services to top-tier private equity, real estate, infrastructure and debt cli-
ents, to be respected for our judgement and integrity and to hire and develop the
most able people through active apprenticeship. With assets under administration of
over $130bn, we provide these services from offices in London, Jersey, Guernsey, Lux-
embourg, Hong Kong, Singapore and New York.

As an owner-managed business, our reputation and success depends on the abso-
lute satisfaction of our clients. This is manifested in our dedication to providing a tai-
lored and individual service to each client.

Introduction

Environmental, Social and Governance (‘ESG’) is not a new trend, it dates back to the
1960s, but has seen a rise in prominence in recent years, as both individuals and firms
are becoming more aware of environmental, social and governance challenges
around the world.

ESG, ‘sustainable investing’ and ‘responsible investing’ are umbrella terms relating to
a business or company’s sustainability or ethical impact. However, there isn’t
a consistent definition or standardised methodology for measuring or quantifying
ESG1, including within alternative assets, where longer term investment horizons
mean that they are more exposed to ESG risks. Later in this report, we will take a look
at what the industry is already doing to quantify ESG, and how managers can contin-
ue to develop their thinking in this area.

ESG has moved from a mere measure of corporate
responsibility to becoming a driving factor in
investment processes.

Most recently, the investment market saw ESG move beyond just a ‘box ticking’
exercise to examining how it can best be implemented to maximise its benefits.
Further, there is increased scrutiny from investors on ESG metrics for those funds
that they invest in to avoid greenwashing within portfolio assets.

This report aims to briefly share some of our knowledge and experience of the ESG
landscape and its growing influence and implementation in the alternative assets
sector.

Please do get in touch if you have any further questions. We would be delighted
to help.

1 This report will use ‘ESG’, ‘sustainable investing and ‘responsible investing’ interchangeably.

4

ESG: UNDERSTANDING ITS ROLE State of Play
FOR ALTERNATIVE ASSETS
It is hard to look at any fund strategy and not consider the
STATE OF PLAY implications of ESG on the entire life cycle: from fundraising,
to deployment, to ongoing portfolio management. There was
perhaps a perception some years ago that having strong ESG
credentials came at a cost, in the form of diminished returns,
but this has now been firmly dispelled. ESG is now embedded
in the fund management industry, with ESG requirements of-
ten being explicitly outlined in LPAs and PPMs, being linked
with credit facilities, and even being tied to senior-debt loans
at a portfolio company level.

There are several key studies which show may have reached the tipping point
that adhering to solid ESG principles re- whereby a lack of consideration for ESG
sults in a marked improvement in fund is a detracting factor when it comes to
performance, with many ESG focused fundraising. As an administrator, AIFM
funds outperforming their benchmark. and depositary to a wide range of fund
Later in this report, we will discuss the ef- sizes and strategies, we are in the privi-
fect that adopting solid ESG principles leged position of witnessing first-hand
has on fundraising, as LPs increasingly the effect that integrating ESG consider-
seek responsible investments. Outside of ations into investment policies has not
performance and fundraising, ESG is be- only on fundraising, but also on fund re-
coming a matter of law and regulation, turns.
with multiple requirements now being
imposed on fund managers. For exam- In this report we aim to outline some of
ple, in 2015 the Task Force for Climate Re- the key considerations for managers
lated Financial Disclosures (‘TCFD’) was when thinking about their ESG strategy,
formed, with the aim of inc­ reasing trans- including how to quantitatively measure
parency for financial mark­ et participants their ESG credentials, the impact of ESG
relating to climate-relat­ed risks. The UK on fundraising, and what the newly im-
became the first G20 country to make plemented regulatory changes relating
TCFD-aligned disclosures mandatory, ef- to ESG disclosures mean for alternative
fective from 2025, while in Europe the assets.
TCFD recommendations took the form of
the Sustainable Finance Disclosure Reg-
ulation (‘SFDR’). The SFDR applies to
firms operating in EU member states
from March 2021, and we will discuss
what this means for managers with Eu-
ropean funds, but also those looking to
access European capital.

It is clear then, that having robust ESG
policies relating to a manager’s invest-
ment strategy is important. No longer
are ESG policies a differentiator, but we

5

ESG: UNDERSTANDING ITS ROLE Fundraising
FOR ALTERNATIVE ASSETS
If you had mentioned the term ‘ESG’ to an institutional inves-
FUNDRAISING tor several years ago, it was likely that only a small part of their
allocation was committed to funds with an ESG strategy. Fur-
ther, there was perhaps even a notion that ESG investing came
at a cost to performance, but having an ESG allocation was the
“right thing to do.”

In more recent times, it has become risks are managed. The United Nations
widely recognised that integrating ro- Principles for Responsible Investment
bust ESG policies in to a fund’s strategy (‘UNPRI’) most recently said that as many
reduces the ESG related risk, and can ul- as 89% of its signatory LPs now use some
timately have a positive impact on re- form of responsible investment due dili-
turns. A 2020 Financial Times report gence questionnaire or request for pro-
showed that 6 out of 10 sustainable funds posal as part of the fund selection pro-
delivered higher returns than their equiv- cess. In the UK, the Pensions Regulator
alents during the last decade. Meanwhile introduced ESG reporting requirements
a Morningstar study showed that funds for trustees in 2019, and several insurers
with low ESG related risk significantly have now started reporting on how ESG
outperformed those with high ESG risk principles affect their investments. With
exposure. this increased focus on ESG from LPs,
particularly in Europe, there has been a
When it comes to fundraising then, it is rise in increasingly detailed side letter re-
clear that the notion of ESG no longer quests, and in response some GPs are
comes at a cost to performance, and in now prepared to include ESG metrics in
many cases actually enhances it. This ap- their standard reporting templates, ac-
plies both to ESG-focused funds, i.e. cording to Sam Kay, Partner at law firm
those that are specifically looking to Travers Smith. These side letter requests
achieve ESG related goals, and those range from the requirement to notify the
funds with low ESG-related risks. When LP in case of any ESG related issues in the
thinking about private funds in particu-
lar, the ESG-related risks are more prom- 89%
inent due to the long term investment
horizons, particularly as the world moves of LPs use some
to a more sustainable economy. As the form of responsible
investment industry continues to recog- investment due
nise the benefits of ESG strategies, we diligence questionnaire
have seen the launch of products such as
green bonds, and the “Guernsey Green
Fund,” which aim to give investors trans-
parency when it comes to investing in
the green investment space.

For these reasons, institutional investors
are increasingly placing scrutiny on the
ESG policies for those funds in which
they invest, and how the ESG related

6

ESG: UNDERSTANDING ITS ROLE portfolio and conducting suitable ESG 69%
FOR ALTERNATIVE ASSETS risk analyses, to adding ESG as a stand-
ing discussion point in the LPAC agenda. of private equity GPs are
FUNDRAISING already making a formal
For managers then, some are already commitment to responsible
aware of how strong ESG credentials can investment in their LPAs
give them a competitive advantage
when it comes to fundraising, with a re- managers thinking carefully about their
cent study showing that 69% of private own ESG policies, and the impact of their
equity GPs are already making a formal investment strategy. In particular, it is go-
commitment to responsible investment ing to become increasingly important for
in their LPAs, while 89% refer to it in their managers to be able to demonstrate
PPM. There are also increasingly detailed how they are quantifying their ESG im-
disclosures being made with respect to pact, something that we will touch on
sustainability risks, both in terms of mar- later in this report. With ESG policies be-
ket and regulatory risks, as well as more ing increasingly considered by LPs when
detailed performance reporting through- making their investment allocations, we
out the fund lifecycle. This is an evolution expect to see even closer attention paid
from just having an ESG policy or being a to ESG related risks within an investment
PRI signatory for example, and as one ad- strategy, and those managers that have
visory firm told us, a simple ESG policy robust policies and considered strategies
will no longer satisfy the due diligence in place will likely be the most successful,
requirements of LPs, there has to be both in terms of fundraising but also per-
meaningful impact. formance.

Looking ahead, for managers getting
back out on the road in the near future, it
is possible that the attitude towards ESG
is a paradigm shift from their last fund-
raise, and it’s not unexpected that man-
agers that do not have a cohesive ESG
strategy may find it tougher to meet
their fundraising targets. With this in
mind, we expect to see an increase in

ESG: UNDERSTANDING ITS ROLE7
FOR ALTERNATIVE ASSETS
Spotlight on
FUNDRAISING
Guernsey Green Fund

In 2018, Guernsey created the world’s first regulated green
fund, the Guernsey Green Fund. Designed to enhance in-
vestor access to the green investment space, the Guernsey
Green Fund provides a trusted and transparent product
with defined standards relating to environmental damage
and climate change. As of Q3 2020, Guernsey Green Funds
held a total net asset value of £3.3 billion.

In order to qualify for Guernsey Green Fund Status, the
fund must;

— Deliver a net positive outcome for the environment;

— Invest at least 75% of its capital in assets concerned
with mitigating environmental damage;

— The remaining 25% (or less) of capital can be invested in
other assets, provided that this investment does not
compromise the net positive environmental impact.

New or existing (registered or authorised, open-ended
or closed-ended) funds can apply for Guernsey Green Fund
status, and the fund can be certified by either an independ-
ent third party, or by a self-certification process. The certifi-
cation is then assessed in accordance with the Guernsey
Financial Services Commission Green Fund Principles, and
third party monitoring and verification of adherence to the
disclosed investment criteria is required on a monthly basis.
The regulatory designation can be obtained in up to
five days.

8

3 PortfolioESG: UNDERSTANDING ITS ROLE
ConsiderationsFOR ALTERNATIVE ASSETS

The lack of a consistent definition for ESG has seen thePORTFOLIO CONSIDERATIONS
development of a huge number of frameworks designed to
quantitatively measure both its implementation and its impact.
Several organisations have published their own frameworks,
including MSCI, the Global Reporting Initiative (‘GRI’), UNPRI
and the World Economic Forum. This has resulted in a lack of
transparency and a clear, comparable method of measuring
and monitoring the effectiveness of ESG factors against a
globally recognised standard. Despite this lack of transparency
or clarity, regulators are yet to agree a clear and harmonised
framework by which to measure the implementation and
subsequent impact of ESG. An overarching framework and/
or clear terminology would help investors utilise the same
metrics when evaluating the relative merits of one investment
against another. Added to this lack of transparency is the threat
of greenwashing, which has become of increasing concern
amongst global LPs.

Despite a lack of consistency in the For fund managers then, there is an on-
way ESG metrics are measured, there are going question of how to effectively im-
a number of firms that do quantitatively plement ESG considerations in to their
measure ESG within portfolio assets. For portfolio. For Real Assets for example,
example, in real estate, there is a focus on there is first and foremost the environ-
environmental factors which are readily mental impact that the asset itself has,
applicable to this sector, with ratings as buildings and the construction sector
such as Energy Performance Certificates are responsible for 36% of global energy
(‘EPC’) and the Building Research Estab- consumption and nearly 40% of emis-
lishment Environmental Assessment sions according to the International En-
Methodology (‘BREEAM’) that can easily ergy Agency. These impacts are linked to
be used to substantiate claims of envi- changing market demands and cli-
ronmentally friendly assets. Other stand- mate-related policy, known as “transition
ards such as the Global Real Estate Sus- risks” and are at present more urgent
tainability Benchmark (‘GRESB’) aim to than “physical risks,” particularly if gov-
provide standardised and validated data ernments remain committed to the Paris
on the management and performance
of ESG in real estate, with greater em- Greenwashing has
phasis being place on the latter in the become of increasing
coming years. Social and governance is- concern amongst
sues should not be forgotten of course, global LPs
not least because of the reputational im-
plications that these can have on a firm,
and these are likely to be of greater
consideration within private equity port-
folios.

9

ESG: UNDERSTANDING ITS ROLE Agreement. On the other hand, physical greater downside protection in the
FOR ALTERNATIVE ASSETS risks that can affect an asset, such as longer term. Providers such as The Cli-
flood, fire or storm damage should be mate Service have emerged to help with
PORTFOLIO CONSIDERATIONS taken in to account when deploying cap- this, enabling real estate owners to view
ital. Many cities that are susceptible to the potential mid to long term transition-
environmental risk are working in part- al and physical risks to their assets, often
nership with the private sector to invest incorporating this analysis in to their ac-
in resilience through infrastructure, poli- quisition processes. Founder James Mc-
cy, and science-based decision making, Mahon said that increasing numbers of
and understanding the extent of this in- LPs are performing risk analyses on their
vestment is important for fund manag- commitments using their tool too. There
ers in order to properly compare market is also the impact of insurance changes
level risk. According to a recent Urban to be considered; more recently some in-
Land Institute study, most real estate in- surers have raised prices or even refused
to issue new policies in high risk areas. In
Climate change is not an extreme scenario, some buildings
currently a common may become uninsurable, making them
factor in valuations for ineligible for debt financing.
most of the industry
For private equity managers, there are
vestors acknowledge that climate risk is fewer physical risks to consider. The risks
not currently a common factor in valua- usually take the form of workplace, mar-
tion for most of the industry, but sooner ket and governance issues within portfo-
or later this will become more common lio companies. With the Covid-19 crisis
practice. As a result, managers that move bringing employee wellbeing in to focus
early to adopt these practices will have globally, private equity firms may find
that having greater emphasis on proper
employee welfare schemes in place
within their portfolio companies will be
beneficial to employee retention and so

10

ESG: UNDERSTANDING ITS ROLE company performance. As well as em- 43%Diverse boards are
FOR ALTERNATIVE ASSETS ployee welfare, the importance of diver-
sity and inclusion within companies has more likely to see
PORTFOLIO CONSIDERATIONS become widely recognised, with a 2018 above average profits
McKinsey study showing that companies
with more diverse boards were 43% more ply being able to display it that will be the
likely to see above-average profits. In most successful. The longer term invest-
2020, Goldman Sachs committed to only ment horizons of private funds mean
taking companies public if they have at there is greater exposure to ESG related
least one diverse board member, and risks, and managers should carefully
NASDAQ filed a proposal with the U.S. consider these when deploying capital.
Securities and Exchange Commission In the short term at least, not consider-
which would require all listed companies ing ESG factors can mean not optimising
to disclose diversity statistics regarding returns. In the longer term, greater expo-
their board of directors. Outside of the sure to ESG risks has greater potential for
workplace, ESG risks relate to issues such damage.
as greenhouse gas emissions, fuel and
water consumption, human rights, com- DUE DILIGENCE
munity relations, and business ethics
and transparency. Clearly, the focus on With a lack of a consistent industry set of
each of these will vary between sectors, KPIs for ESG, managers have flexibility to
and a recent Deloitte study found that choose their areas of focus with respect
firms which focus predominantly on the to ESG within their individual portfolios.
material issues which affect them en- Some of this may be strategy driven, for
joyed the greatest financial returns. Pri- example a fund investing in professional
vate equity firms are also now starting to services companies will likely have less of
find novel ways to link ESG metrics to a focus on energy consumption than one
their investment operations, such as that invests in manufacturing. However,
Swedish private equity firm EQT’s recent the variety in ESG focus areas means that
€5bn ESG-linked fund level bridge facili- LPs need to carefully diligence funds
ty. The facility is linked to gender equali- when allocating capital to ensure that
ty, renewable energy adoption and sus- the ESG strategy of their investment
tainability governance policies within the matches their own ESG goals.
portfolio, with improved ESG perfor-
mance meaning lower credit pricing. For ESG related LP due diligence then,
fund managers must be prepared to pro-
It is very apparent then, that the imple- vide meaningful insight in to the effec-
mentation and measurement of ESG re-
lated risks and considerations is already
important for both fund managers and
their investors, and will become increas-
ingly so. While there remains a lack of a
harmonised definition, or set of KPIs for
ESG across the industry, it will be manag-
ers that can best interpret and analyse
their portfolio level data, rather than sim-

PHASES OF ESG DUE DILIGENCE

Screening and Due Investment Investment Ownership Exit
Categorisation Diligence Decisions Agreement and Monitoring

Fig.1: Phases ESG of due diligence throughout the investment lifecycle

11

ESG: UNDERSTANDING ITS ROLE tiveness of their ESG strategy, and be Broadly, we see ESG due diligence bro-
FOR ALTERNATIVE ASSETS able to clearly articulate how this affects ken down into six phases, that include
the performance of the fund. It is also im- both pre and post-transaction diligence
PORTFOLIO CONSIDERATIONS portant to understand how a manager (fig.1). The purpose of this is to under-
will report their ESG performance, which stand the risk profile and exposure of the
in itself comes with the challenges al- acquisition target, as well as uncover any
ready discussed. One investment con- red flags before progressing the invest-
sultant told us they face challenges when ment process. In performing suitable
relying on benchmarks, as these are not due diligence during the investment
always appropriate for reviewing the ESG process, managers can protect them-
performance of their fund investments. selves from future ESG related risks with-
The GRESB scoring system for example, in their individual portfolio, whilst avoid-
can penalise managers operating Value ing damaging their returns.
Add real estate strategies, where assets
often lack strong ESG credentials on ac-
quisition but may be ripe for redevelop-
ment over several years, and indeed only
around 20% of managers using GRESB
are operating these strategies.

For managers deploying capital, suffi-
cient ESG related due diligence at the
outset of the investment process can re-
duce related risks. For example, there
may be financial risk, where a target as-
set has not complied with local laws and
so can incur fines and the loss of con-
tracts after acquisition. Reputational risk
should also be considered, as well as le-
gal risk where the buyer may inherit lia-
bility for historical offences in the target.

Langham Hall ESG Dashboard

With measurement and reporting on ESG performance within a fund portfolio becom-
ing increasingly important, managers need a solution that allows them both to analyse
and present their data.

Langham Hall has developed a prototype ESG reporting and analysis dashboard for
fund managers, allowing them to better understand the effect of ESG within their own
portfolios, whilst providing them with a tool to substantiate their ESG credentials and
demonstrate their performance in this area. This dashboard has been developed specif-
ically with illiquid alternative investment funds in mind, and draws on Langham Hall’s
extensive experience in the industry.

The ESG dashboard uses computable, rather than programmable data, giving fund
managers flexibility in their ability to accurately analyse and interpret data, whilst pro-
viding dynamic reporting for themselves and their investors.

Please get in touch if you would like to learn more.

12

4 RegulationsESG: UNDERSTANDING ITS ROLE
As ESG rises in prominence, there is naturally increased scruti-FOR ALTERNATIVE ASSETS
ny from both regulators and investors, with both parties want-
ing to avoid issues such as greenwashing within the industry.REGULATIONS
Nowhere is this truer than in Europe, and such is the concern
of such issues that some market participants are even under-
reporting their positive impact and green strategy to avoid
being accused of exaggerating their ESG credentials. Despite
regulators pushing for increased transparency, there is as yet
no harmonised approach and, until recently, no regulatory re-
quirement for fund managers to incorporate ESG into any part
of their business.

As part of its “Action Plan for Financing INCREASING TRANSPARENCY AND
Sustainable Growth,” the EU is taking the OBLIGATIONS – UNDERSTANDING
lead on addressing these deficiencies, by THESE REGULATIONS
implementing two sustainability related
regulations. Both of these will affect pri- First adopted in 2019, the Disclosure Reg-
vate fund managers and their financial ulation aims to consolidate the approach
advisers who are managing, advising to ESG disclosure and of what constitutes
and/or marketing funds in Europe. sustainable investment. It creates a uni-
These are: form standard to facilitate comparison of
alternative investment funds (‘AIFs’) and
— T he Sustainable Finance Disclo- attempts to address greenwashing. The
sure Regulation (‘SFDR/ Disclosure Level 1 regulation came into force on
Regulation’)2 which imposes new March 10th 2021, with some additional
transparency obligations and peri- elements becoming effective over the
odic reporting requirements on in- subsequent 2 years. These requirements
vestment management at both apply to “financial market participants”
firm and product level, and; which include AIFMs that are authorised
in an EU member state (EU AIFMs) and
— The Taxonomy Regulation3 ,which AIFMs from outside the EU that market
aims to standardise the terms and or offer funds to investors in the EU (non-
language for environmentally sus- EU AIFMs). Given the granularity of the
tainable activities. regulation it also applies to individual
AIFs, as it delves into the level of the
“financial product”, and some of the
requirements also apply to financial
advisers.

The European Supervisory Authorities
have, as of the 4th of February 2021, re-
leased the final Regulatory Technical

2 R egulation (EU) 2019/2088 of the European Parliament and of the Council of 27th November 2019 on sustain-
ability-related disclosures in the financial services sector

3 R egulation (EU) 2020/852 of the European Parliament and of the Council of 18th June 2020 on the establish-
ment of a framework to facilitate sustainable investment

13

ESG: UNDERSTANDING ITS ROLE Standards (‘RTS’) which provide guid-
FOR ALTERNATIVE ASSETS ance on the practical application of
SFDR. The provisions include:
REGULATIONS
— T emplates for periodic and pre-con-
tractual disclosure;

— G reater granularity of adverse im-
pact indicators based on asset class
as well as far fewer mandatory indi-
cators (reduced from 32 to 14) to al-
low greater flexibility.

The guidance provides both clarity and — I nformation as to whether, and if so
breathing room given they have been how, the particular financial prod-
delayed until January 2022. This gives uct considers principal adverse im-
firms valuable time to prepare, whilst pacts on sustainability factors.
only having to comply with the ‘principal
based’ requirements of the Level 1 text in SFDR also creates a framework to cate-
the short term. gorise products into those with environ-
mental or social objectives, those which
Amongst these high level and principles promote environmental or social charac-
based disclosures, AIFMs must outline teristics and other products. Some prod-
how they integrate sustainability risks ucts will require additional reporting and
into the investment decision making disclosures in order to combat green-
process, and internal processes, whilst washing, and allow investors to make in-
also ensuring marketing communica- formed decisions.
tions remain consistent with such. These
disclosures will need to be made in The Taxonomy Regulation came into
pre-contractual statements made to in- force in July 2020 in order to create a uni-
vestors, periodic investor reports, as well fied EU classification system to provide
as be visible on its website. Disclosures fund managers and investors with a
include: framework that outlines what consti-
tutes environmentally sustainable eco-
At an entity level (available on the web- nomic activities.
site of the AIFM):
As the Taxonomy Regulation and the
— I nformation on its policies on the Disclosure Regulation go hand-in-hand,
integration of sustainability risks in in-scope AIFMs (those identified as be-
its investment decision‐making ing in-scope under the Disclosure Regu-
process; lation) will need to follow the former if it
intends to market a fund with environ-
— I nformation regarding the consider- mentally sustainable credentials.
ation (or not) of principal adverse
impacts of its investment decisions The Taxonomy Regulation adds to that
on sustainability factors; obligation by requiring disclosures of
alignment with the environmental sus-
— A statement on its remuneration tainability criteria set out in the Taxono-
policies and how these are consist- my Regulation.
ent with the integration of sustaina-
bility risks. An activity is considered environmentally
sustainable if it makes a “sustainable
At a product level: contribution” to at least one of the regu-
lations criteria and not harm any of the
— I nformation on its pre-contractual others. It will also have to comply with
disclosures to investors and period- certain technical screening criteria and
ic reports about the manner in minimum safeguards as outlined by the
which sustainability risks are inte- OECD and the UN.
grated into its investment decisions
and the likely impacts of sustaina-
bility risks on the returns of the fi-
nancial product;

14

ESG: UNDERSTANDING ITS ROLE KEY DATES AT A GLANCE
FOR ALTERNATIVE ASSETS
Firms to start complying with the
REGULATIONS first two criteria of the taxonomy
regulation
TAXONOMY REGULATION CRITERIA:
2021
1. Climate change mitigation;
10TH MARCH
2. Transition to a circular economy; ESG policy on websites
and in pre-contractual disclosures
3. Climate change adaptation;
30TH JUNE
4. Pollution prevention and control; AIFMs with more than 500
employees to disclose a statement
5. Sustainable use and protection of on principal adverse impacts
water and marine resources;
31ST DECEMBER
6. P rotection and restoration of biodi- AIFM marketing funds that invest
versity and ecosystems. in economic activity to disclose
objectives according to Taxonomy
This means that, beyond the disclosures Regulation
required by SFDR, under the Taxonomy
Regulation in-scope AIFMs will have the 2022
added obligation to disclose their align-
ment with the environmental sustaina- 1ST JANUARY
bility criteria. Firms to start complying with the
first two criteria of the taxonomy
If an AIF adopts sustainable investment regulation SFDR RTS comes into
objectives then its AIFM has to outline force
the percentage of investment underly-
ing the AIF that qualify as environmen- 13TH JULY
tally sustainable economic activities. If it Commission to publish (every
does not, the AIFM is required to include three years) a report on the
a statement outlining that the AIF’s in- application of the Taxonomy
vestment does not take into account the Regulation (progress, potential
taxonomy’s criteria. revisions, etc)

These regulations signify a new compli- 30TH DECEMBER
ance challenge and reflect the growing All in-scope AIFMs to make
appetite for information on the ESG ef- disclosure statements on principal
forts of private funds, even those which adverse impacts of investment at a
aren’t caught by the regulations. These product level
are wide-reaching and ambitious regula-
tions which do not make explicit distinc- 2023
tion between EU and non-EU fund man-
agers, which is why US and Asian 1ST JANUARY
managers that wish to market funds in Entry into force of the other criteria
the EU should be equally prepared to of the Taxonomy Regulation
comply.

ESG: UNDERSTANDING ITS ROLE15
FOR ALTERNATIVE ASSETS
5 Industry
INDUSTRY INTERVIEWSInterviews

With the ESG agenda becoming increasingly important for
fund managers, we sat down with Manish Sarwal of Impax
and William Kyle of PfP Capital, to find out how ESG is shaping
their day to day operations.

MANISH SARWAL,
DEPUTY HEAD OF FINANCE, IMPAX

Founded in 1998, Impax offers a range of listed equity, fixed
income, smart beta and private markets strategies. All strat-
egies utilise the firm’s specialist expertise in understanding
investment opportunities arising from the transition to a
more sustainable economy.

WILLIAM KYLE,
FUND DIRECTOR, PFP CAPITAL

PfP Capital is a sustainable, real estate investment manage-
ment business specialising in residential development and
investment with the key principles of placemaking and re-
generation at its heart. We invest in private and affordable
housing to generate stable returns for investors and deliver
social value across our communities.

1. H ow has the increased focus on ESG the forefront of investors’ minds. LPs now
affected your fundraising? Have you seek specific examples as opposed to
seen a shift in the way LPs diligence broad statements on ESG which may
your funds with respect to ESG? lack any sort of substance. It goes be-
yond just looking at the Investment per-
MS: The increased focus on ESG has not formance, it’s about understanding the
changed our fundraising, we have always projects we have done in the past, how
prioritised returns to our investors. It just we consider ESG as part of our invest-
so happens that what we do – focusing ment process, and the initiatives we have
on the opportunities arising from the put in place.
transition to a more sustainable econo-
my - meets a lot of ESG criteria for inves- WK: There has certainly been an in-
tors. It’s now a case of formalising these creased focus on ESG in the wider inves-
processes and presenting the informa- tor marketplace and recent investors in
tion in the right format for both current our funds have focussed more on ESG
and potential investors. matters than perhaps in the past. We
have a total-impact approach across all
In terms of LPs’ diligence, with each suc- our funds and are signatories to the UN
cessive fundraising cycle the interest PRI but also work with investors to estab-
we’ve seen towards ESG factors is be- lish appropriate benchmarks that suit
coming more prominent, and is now at their purposes and adopt a tailored ESG

16

ESG: UNDERSTANDING ITS ROLE strategy for each fund. For example, our plied to different degrees. What we do at
FOR ALTERNATIVE ASSETS MMR fund targets an area of identified Impax is publish our annual ‘Impact Re-
market failure in housing provision and port’ to investors, which puts our ESG
INDUSTRY INTERVIEWS we are undertaking a Social Value pilot metrics in to relatable terms, for example
with the Scottish Government to study a €10 million investment in our infra-
the impact of our investment. structure funds will equate to a certain
amount of CO2 avoided which is equiva-
2. Has your LP base changed as ESG be- lent to taking an average number of cars
comes less of a niche strategy and off the road. We have the data within the
more of a prerequisite? report verified by a third party to ensure
verification and accuracy.
MS: Our LP base has not specifically
changed in recent years. Rather, LPs WK: A global standardised measure
more broadly are a lot more focused on would certainly be helpful and we are in-
this area than they were a decade ago. In volved in the ongoing discussions around
the past, ESG investing would have been this through our involvement with vari-
a small proportion of an investor’s capital ous industry bodies including the British
allocation, whereas today it’s either a Property Federation, AREF and Urban
much more significant proportion, or it’s Land Institute. However, there are chal-
a prerequisite for all of their commit- lenges across and within asset classes,
ments. i.e. most environmental metrics are very
commercial real estate focussed rather
WK: PfP Capital have always had Re- than residential, or new build rather than
sponsible Investment at our core which existing buildings. It’s a very complex
encompasses ESG and this has tended area! However, a common starting point
to drive a certain type of investor in our is to align with the UN Sustainable Devel-
direction. From that perspective our LP opment Goals and we start with four
base has not fundamentally changed. core principles across our funds, seeking
Our investors certainly tend to have ESG to help develop and maintain sustaina-
as a focus and are ultimately looking to ble communities, support the health and
us to invest in sustainable communities wellbeing of our residents and commu-
which deliver for both residents and in- nities, protect the environment and nat-
vestors and have a positive impact on ural capital, and create social value.
the surrounding neighbourhood.
4. What have been Impax’s biggest
3. Given there isn’t a global standard- challenges in implementing ESG pol-
ised way to measure ESG, how have icies in your investment strategy?
Impax measured ESG in your funds?
MS: A lot of factors that are considered
MS: The fact that there is no global defi- within ESG policies are initiatives that we
nition for ESG or responsible investing is have been doing for many years across
a key challenge, because the term is all our funds and assets. For example,
open to interpretation and can be ap- when developing a business we look at

17

ESG: UNDERSTANDING ITS ROLE what would be considered governance 6. Have you had increased costs associ-
FOR ALTERNATIVE ASSETS related areas, like ensuring there is a con- ated with your ESG objectives?
sistent parental leave allowance for all
INDUSTRY INTERVIEWS employees, that there is diversity at MS: In a nutshell, no. This is because we
board level, or that there are employee do not aim to tick boxes from an ESG
wellbeing initiatives. These practices are checklist in the process of constructing
all common sense to us as opposed to in- our wind, solar and hydro-electric pro-
itiatives only for the purpose of an ESG jects. Rather ESG initiatives fit seamless-
policy. ly into the projects.

Our challenge lies in taking all the initia- WK: In practical terms developing homes
tives and practices we do and formalis- to a higher and more efficient standard
ing their presentation in a way that fits will inevitably cost more than a poorer
into measurable ESG criteria for inves- product. We have always sought to deliv-
tors. er the highest quality product we can,
believing that this route will ensure our
WK: Working with developers to a price homes are as future proof as possible
point but trying to deliver ever higher and ultimately be more efficient over
standards requires a balanced approach their lifetime. This makes sense for both
to new builds. Equally the upgrading of tenants in terms of running costs as well
older stock comes with a number of chal- as for investors.
lenges, which we are approaching in one
of our funds via a comprehensive pro- 7. W hat’s the long-term outlook you see
gramme of EPC upgrades and refurbish- for ESG in the Private Funds/Real Es-
ments. Looking ahead, developing a tate sector?
comprehensive and viable Net Zero Car-
bon strategy is our next strategic ESG MS: The trend of ESG will become even
challenge. more prevalent in investors’ due dili-
gence, as it moves from being a separate
5. Has having structured ESG creden- allocation in an LP’s portfolio, to becom-
tials helped optimise returns from ing a requirement across all investment
your portfolio assets? If so, how? Has allocations.
ESG been a net positive for your re-
turns? Given the lack of a global formal defini-
tion for ESG in an investing context, it will
MS: First and foremost, we are here to be interesting to see governing bodies
generate superior returns for our inves- providing more guidance and best prac-
tors. The way we do that is by investing in tice recommendations to fill this gap.
the transition to a more sustainable
economy, and the initiatives we have in WK: ESG in real estate is here to stay and
place fit seamlessly into the assets that the key now is to establish the appropri-
we are investing in. However, in certain ate industry standards which not only
cases it is not possible to numerically cover commercial real estate and exist-
quantify the impact in terms of returns. ing stock but residential new build. The
For some of these initiatives, for example current measures fall short of the holistic
employee wellbeing, there is overwhelm- approach needed and the discussion on
ing evidence of the benefits a focus on new standards is currently fragmented.
this can have on company performance, PfP Capital will continue to work with our
which will ultimately improve returns in industry colleagues and regulatory bod-
the long run. ies on a standardised approach which
will provide clear targets and which in-
WK: As a relatively new business it would vestors will be able to easily understand
be too early to provide any detailed data and rely upon.
from our existing portfolios, however we
firmly believe that by applying our re-
sponsible investment approach we can
help to protect and enhance asset value
and improve long term investment per-
formance.

18

References

FUNDRAISING
https://www.ft.com/content/733ee6ff-446e-4f8b-86b2-19ef42da3824
https://www.morningstar.co.uk/IntroPage.aspx?site=uk&backurl=https%3A%2F%2F-
www.morningstar.co.uk%2Fuk%2Fnews%2F208661%2Fdid-esg-pay-off-for-fund-in-
vestors-last-year.aspx
https://www.unpri.org/news-and-press/pri-data-shows-progress-on-ri-in-private-eq-
uity/4053.article
https://www.gfsc.gg/industry-sectors/investment/statistics

PORTFOLIO CONSIDERATIONS
https://www.iea.org/reports/global-status-report-for-buildings-and-construc-
tion-2019
https://knowledge.uli.org/reports/research-reports/2020/-/media/b81db4bb-
c77845f7834f24b0e974dd7a.ashx
https://www.mckinsey.com/business-functions/organization/our-insights/deliver-
ing-through-diversity
https://www2.deloitte.com/content/dam/Deloitte/us/Documents/risk/us-sustainabil-
ity-reporting-pov.pdf

REGULATIONS
https://eur-lex.europa.eu/eli/reg/2019/2088/oj
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32020R0852

Langham Hall Contact Details

ROB SHORT
MANAGING PARTNER
+44 (0)7775 806 308
[email protected]

HANNY TIRTA
HEAD OF AIFM
+44 (0)20 3597 7907
[email protected]

TOM PINNELL
ASSOCIATE DIRECTOR,
BUSINESS DEVELOPMENT

+44 (0)20 3597 7932
[email protected]

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