Environmental, Social and Governance Policy
This policy document outlines Prefequity LLP’s (“Prefequity”) approach to integrating Environmental, Social and Governance (“ESG”) factors within its investment risk management framework. It applies as standard to all investments made within all funds managed or advised by Prefequity.
This policy is reviewed on a regular basis by Prefequity and approved by the partners. It is updated where necessary to reflect changes in circumstances and actual practice.
1. UNPRI
Prefequity is a signatory to the UNPRI’s Principles for Responsible Investment (the “Principles”). The issues described in the Principles for Responsible Investment (www.unpri.org) regulations are incorporated in our investment analysis and investment decision-making process. We will regularly report to the UNPRI and investors on our ESG-related activities and improvements.
2. Introduction
Prefequity is an investment manager/advisor to private credit funds (“Prefequity Private Credit Funds”).
Prefequity confirms that the ESG issues described in the Principles for Responsible Investment regulations will be incorporated in our investment analysis and our investment decision-making processes. However, as providers of debt-based capital solutions the scale and magnitude of such engagement need to be put into context. As debt providers, we are not majority owners of the companies we invest in and as such have limited control over the issuers and restricted means with which to influence them.
As institutional investors, we have a duty to act in the best long-term interests of our investors. The policy is applicable to Prefequity’s approach to executing investments for all capital deployed after the policy’s publishing date. With respect to investments that Prefequity Private Credit Funds make, we incorporate ESG considerations throughout the lifecycle of the fund including screening, due diligence, value creation and oversight in those businesses. This policy refers to “material” environmental, social and governance factors, which Prefequity defines as those considerations it deems in its sole discretion to be reasonably likely to impact the financial or operating performance of a company.
In this fiduciary role, we believe that ESG issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognise that applying these Principles may better align investors with the broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following:
1. We will incorporate ESG issues into investment analysis and decision-making processes.
2. We will be active investors and incorporate ESG issues into our investment policies and practices.
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
4. We will promote acceptance and implementation of the Principles within the investment industry.
5. We will work together to enhance our effectiveness in implementing the Principles.
6. We will report on our activities and progress towards implementing the Principles.
Regular ESG training will be conducted as required for all Prefequity employees to ensure that ESG issues remain at the forefront of our decision-making regardless of role.
3. Investment philosophy
Our key target is achieving attractive risk-adjusted returns for our investors. This is dependent on a thorough due diligence process to evaluate the creditworthiness of a borrower prior to making an investment and pricing the risk appropriately.
We believe ESG factors can potentially have a material impact on an issuer’s long-term financial performance. Given the limited upside and potentially significant downside of debt-based investments, the focus of Prefequity’s ESG analysis is on understanding downside risks. Poorly managed ESG risks can lead to inefficiencies, operational disruption, litigation and reputational damage, which may ultimately impact an issuer’s ability to meet its financial responsibilities. Supplementing traditional financial analysis by reviewing ESG-related management practices and performance is therefore not only prudent but also in line with our fiduciary duty to optimise investor returns.
In addition, we actively look for investment opportunities in companies that promote best practice in ESG-related matters.
4. ESG investment factors
ESG covers a broad agenda, including issues relating to the workplace, community, marketplace, environment and governance. Prefequity recognises that ESG factors can have a significant impact on private credit investments, creating sustainable value within companies.
Environmental
Sustainable business practices, with a focus on limiting the impact on the environment, have become of increasing importance to the business community. We acknowledge our responsibility to preserve the environment for coming generations and encourage appropriate business practices from other stakeholders.
The issues in this field are diverse but the main areas are:
− Reduction of toxic emissions, fluids and other materials
− Sustainability of resources
− Efficient energy consumption
− Preservation of forests and other natural habitats
− Responsible disposal of hazardous materials
− Reducing the impact of climate change
Social
Inclusion, diversity and equality have become increasingly seen as important competitive differentiators for companies.
There may be significant commercial benefits for businesses that have implemented inclusive and diverse work business practices. During Prefequity’s due diligence process we particularly look at the impact a company has on its staff, local communities and society as a whole.
The main areas of consideration are:
− Avoidance of any complicity in human rights abuses
− Health and safety
− Avoidance of child labour and related business practices
− Inclusion, equality and diversity
− Non-discriminatory practices
− Avoidance of exploitative business practices
Corporate Governance
Generally, corporate governance refers to the responsibilities of management and the oversight of a company including values, structures, and accountability processes and procedures.
In the context of Prefequity, this relates to the following areas:
− Management structure
− Checks and balances between members of the management team and the board
− Separation of duties
− Incentive structures and executive remuneration
− Stakeholder management
− Corporate codes of conduct
5. ESG internal resources and communication
The partners are responsible for ensuring that:
− The policy is up to date and reflects the best practices of Prefequity on an ongoing basis
− All team members receive appropriate training as required on ESG-related matters
− Team members follow the ESG policy in their investment processes
− Best practices are promoted to external stakeholders
6. ESG investment and risk management approach
We employ an ESG integration strategy, assessing ESG considerations in parallel with conventional credit and investment considerations during our due diligence process. As outlined in the table prepared by PRI below (adapted by Prefequity), there are a number of steps between pre-deal and exit during which traditional and ESG considerations will be analysed.
We do not automatically exclude businesses from investment purely on ESG risks if the partners feel that such risks are reflected in the overall assessment of the opportunity.
The key reason for deploying this strategy is to make sure the investment teams are aware of ESG analysis tools and that informed investment decisions are taken having incorporated ESG factors in the process and reflecting it in the risk / return profile of each investment.
The level of ESG-related work depends on a number of aspects, such as which industry the company operates in.
Being a private credit investor rather than a majority owner of companies, we are aware that our influence over management teams may be limited. We therefore take a pragmatic approach when it comes to the appropriate level of ESG research as part of our investment process.
Overall, our ESG integration takes place on four levels:
− Company: What is our ESG credit risk at a company level? What risks could arise going forward? This usually comprises an analysis of the various ESG risks and opportunities of the business using a number of information sources such as quantitative data, interviews, third-party due diligence work, etc.
− Sector: What are the key ESG issues in the respective industry? What can be done to mitigate the risks identified? The sector analysis generally consists of a detailed top-down macro-level analysis of trends and developments relating to political, economic, social, technological and legal aspects. Our main sources of information are third-party due diligence providers, industry experts and proprietary analysis conducted in-house.
− Portfolio: How do identified risks compare to other elements of the portfolio?
− Group: How would the investment impact the overall strategy of Prefequity?
ESG engagement
We believe that we, as private credit investors, have an important role in engaging with businesses on ESG matters. However, the scale and magnitude of such engagement needs to be put into context. As debt providers, we are not majority owners of the companies we invest in and as such have more limited means to influence issuers.
During our investment analysis, the investment team meets the company management team and has the ability and obligation to raise questions relating to ESG.
On a case-by-case basis, we might further intensify our engagement, for example in the case of a specific event that occurred. This engagement does not end at the point of our investment but continues throughout the investment period. We are in continuous contact with each of our investee companies and we actively engage with them on ESG as well as non-ESG related matters.
Recognising the limitations as a debt provider rather than an owner of a business, we will continue to improve the ways to perform effective ESG engagement to maximize the impact of such engagement and make the most efficient use of resources, including involving investors and other stakeholders.
ESG negative screening
In addition to ensuring we follow all applicable laws, regulations and economic sanctions, we apply ESG negative screening for all Funds. The screen is centred on excluding corporate issuers from involvement in a number of products and industries. The scope of the restrictions is reviewed on a regular basis.
Currently, we do not consider businesses as a potential investment that are involved in:
− an illegal economic activity (i.e. any trade or other activity that is illegal under the laws or regulations applicable to the Funds, for example human cloning for reproduction purposes);
− the production of and trade in tobacco and related products;
− casinos and equivalent enterprises including online gambling;
− pornography; or
− the production of and trade in weapons and ammunition.
7. Collaborating and promoting best practice
We actively encourage the adoption of the Principles internally and externally. We provide training internally as required. Members of the team share knowledge, for example in our interactions with investee companies and investors.
8. Transparency and accountability
We are committed to providing relevant and timely information and reporting of our ESG efforts internally (e.g. communication between the investment teams) as well as externally (e.g. investors and other stakeholders).