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Stafford Capital Partners

PRI reporting framework 2018

You are in Indirect – Manager Selection, Appointment and Monitoring » Outputs and outcomes

Outputs and outcomes

SAM 08. Percentage of externally managed assets managed by PRI signatories (Private)


SAM 09. Examples of ESG issues in selection, appointment and monitoring processes

09.1. Provide examples of how ESG issues have been addressed in the manager selection, appointment and/or monitoring process for your organisation during the reporting year.

Topic or issue
          Active engagement with investor in a mandate on labor relations issues
        
Conducted by
Asset class
Scope and process

A particular mandate investor with an ethos aligned to advocacy for labor relations and working conditions expressed concern about avoiding investments prone to exploitation of labor relations working conditions by reliance on minimum legal obligations. These “minimum legal obligations” were “grey areas” for the mandate investor as on its face they conflicted with its ethos, despite the return targets being met or exceeded.  

We followed our normal process for responding to ESG “incidents”:

Step 1: Recognize the investors’ concerns or identified controversies

Step 2: Respond and engage with the investor to ensure those concerns are acknowledged, understood and addressed by third party managers of investments;

Step 3: Review facts and circumstances, recommending:

If necessary, escalation to the ESG Committee or its Chair;
Any modification to the due diligence process or ongoing monitoring, to reflect modified objectives and to sustain a collaborative approach;
Communicate revised objectives to underlying managers;
Evolve and monitor the revised processes and objectives to ensure that third party managers remain compliant

Step 4: Preserve the investor’s engagement to ensure that it continues to remain an advocate for its moral and ethical position as an “insider” rather than an outsider.

Outcomes

The mandate investor acknowledged that they had not expressed explicitly their ethos affecting labor relations and how that would be incorporated into any investment decisions and portfolio design. Thus, through our ESG Committee’s Chair, we offered assistance in the review and amendment of those investment policies and procedures to express their moral and ethical position, and to incorporate relevant considerations to identify, assess, manage and mitigate risks and opportunities affecting labor relations.

As a consequence, an opportunity exists to design a supplementary mandate for the purpose of identifying investments and third-party managers aligned to new policy and framework. The mandate investor acknowledges that this might result into a different return profile than for an unconstrained investment strategy. However, the mandate investor sees this as an opportunity to influence the elevation of third party managers with aligned ethos and so influence the development of those emerging managers through guidance on language in investment documentation, selection of portfolio investments and/or pricing of investments.

Topic or issue
          Sensitive business cases escalated to ESG Committee
        
Conducted by
Asset class
Scope and process

Where the Deal Team of any service line considers an investment contains a business case that contains sensitive ESG considerations.

These "sensitive business cases" are progressed before commencing proposal submission to the Investment Committee to proceed for diligence review. This process would normally occur where investment personnel considers a deal to possess sensitive environmental, social and governance issues and so requires special consideration by the ESG committee.

Outcomes

A sensitive case was submitted by an investment professional who, because of his specific expertise in sustainable agriculture, identified potentially sensitive ESG issues and risks related to exposure to investments in genetically modified crops (GMO crops). 

The ESG Committee's considered the "sensitive business case" by contributing expertise and research, drawing upon considerations made by governments, industry bodies, scientific research and a balance of media responses to GMOs. They concluded that GMO crops are (a) legal and (b) common practice in the Americas and some other regions, thus should not be excluded from investments. However, since the use of GMOs is controversial in some geographies, a third-party investment manager for a mandate potentially providing exposure to GMOs should give assurances of regulatory oversight and reporting, and ensure active monitoring and disclosure of their exposure. The Committee further recommended that, while a non-GMO portfolio could be offered to clients, clients should be advised this would entail significant limitations in terms of diversification across geographies and crops. 

The ESG Committee determined that this investment or any other investments track progress and continue to look at the balance of considerations between sustainable development goals, harm to the environment or communities and economic sustainability. 

 

Topic or issue
          Research into the impact of a potential U.S. withdrawal from Paris Climate Agreement.
        
Conducted by
Asset class
Scope and process

The Paris Agreement's aim is to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels. With the new US administration elected in 2016, there was concern over a US withdrawal from the agreement on a federal level. Stafford wanted to understand any potential impact to our investments and firm if this withdrawal commenced.

For process we conducted interviews with all of our sustainable GP relationships to understand both likelihood of withdrawal and potential impact to the sustainable investment community, and more directly, to any portfolio holdings we might have through these managers. We also interviewed industry experts outside our managers to further bolster insight into the impact, and performed primary research into the topic. We then correlated the data, used it to form our own opinions on the impact to our portfolio and synthesized the information in a document that collected the summaries of the interviews.

Outcomes

We found the event to most likely be a non-issue with minimal to no immediate effect on our investment portfolio. There were multiple reasons for this including:
1) that federal tax incentives for renewable energy were already locked in place and set to decline according to a schedule
2) most of the political momentum for the space came form the state and local level. Quickly after announcing intent to withdraw from Paris, a large number of state / local governments reaffirmed commitments.  It was a rejuvenation of interest in many ways
3) corporate reaction to the withdrawal was similar to re-energize large company commitment to sustainably and renewable energy
4) underlying economics of the technologies and products were strong enough without any political incentives or pressure, which would enable these technologies to compete on their own.

US withdrawal increases the perceived ‘policy’ risks associated with climate-related investment opportunities. 
Thus, we will also continue to use our own advocacy voice and capabilities to emphasise the importance of stable and consistent policy measures to regulators and governments, as part of our collaborative efforts with the PRI, IIGCC and IGCC groups.   

 

Topic or issue
          White paper on sustainable investments over 12 years, an analysis of key success factors to the pursuit of sustainability and resilient long term financial performance.
        
Conducted by
Asset class
Scope and process

As active investors in the sustainable and clean tech field over a 12-year period, we were privy to detailed portfolio company and fund level information on successes and failures in the space. We had seen both strong and weak investments over that time, and wanted to understand if key success factors could be correlated between the best performing investments in the space. We analyzed over 30 funds, and over 320 portfolio investments. We looked at 10 key metrics in regard to company stage, sector, management characteristics, investors, etc. We then analyzed the data to see if there was commonality between the best performers and underperformers. We found multiple key success factors which were statistically more present in the best performers and less present in the underperformers. We further studied the causality of these factors, including detailed interviews with investors and portfolio companies to determine why these particular factors were present in the best performers.

Outcomes

Thus, we shared a whitepaper with current and prospective clients. The paper detailed our study and findings. We used the research findings to reinforce our go forward investment strategy for sustainable private equity investments.

Our conclusion showed that increased volatility of the sustainable space rewarded control strategies which allowed for streamlined, efficient decisions and clearer alignment. In contrast, non-control strategies with too many passive stakeholders created dysfunction in times of distress or misalignment of economic interests. 

A similar conclusion was drawn from investments where first private equity capital was invested to a company. Portfolio companies which previously had no private capital were typically family owned businesses where entry valuations were generally lower and a number of 'low hanging fruit' operational improvements could be completed in short order to increase value. 

A third commonality amongst successful companies was a bias to service business models versus hardware business models. A services oriented structure generated high reoccurring revenues and stable cash flows, which helped pay down debt and boost overall investment returns.

Lastly, the length of operating history of the portfolio companies allowed us to evaluate the efficacy of sustainability as part of the resilience of their business model, over the long term.

Topic or issue
          Investigation of a localised root fungus outbreak at a pine plantation in southern Brazil
        
Conducted by
Asset class
Scope and process

Relating to the Forestry Asset class. 

In December 2017, as part of its ESG reporting to Stafford, the Timberland team were made aware of an outbreak of fungus at an investor-owned pine plantation in southern Brazil.  The fungus had not been recorded in the area before to the extent observed.  The fungus was reported across other forest plantations in the local area and thought to be attributed to record rainfall of over 3,000 mm in the region this calendar year.


The fungus significantly impacted an area of 140ha with an additional 300ha moderately impacted but closely monitored.


The key risks are that the pine forests could face significant mortality.  There was also a risk of the fungus spreading to natural vegetation and farmland.  It was not reported to be hazardous to human health.


Upon being alerted to the threat, Stafford remained engaged with the manager to understand the issue and ensure adequate action was being taken.

 

Outcomes

The manager's report back to Stafford was that they had assigned staff to investigate the situation.  They were working with EMBRAPA, the national agricultural research institute to understand and look at options for constraining the fungus.  


Stafford will continue to engage and work with the manager to ensure the risks posed by the fungus are minimised both to preserve the value of the forests and minimise impact to the industry and the broader environment.
In ESG areas such as this, Stafford sees it has an important role to play in guiding our GPs, setting standards of what is important and in remaining engaged on ESG topics of concern through to their conclusion.  This reinforces existing sustainable forest management certification and helps to reinforce strong standards across our investments in the timberland asset class.

 

09.2. Additional information.

We would like to share other case studies we thought relevant for the period of review. 

1. We also considered the Grenfell Tower fire and implications for the safety of the occupants of clad buildings within our infrastructure portfolio. 

Scope / Processes: On 14 June 2017, 71 deaths and over 70 injuries were recorded when a 27-storey residential tower block in London was engulfed in fire.  The cladding material and its installation are thought to have been significant contributing factors. We liaised with our investment managers in order to identify whether any buildings within their portfolios had used the same cladding materials and/or installation methods.  

Outcomes: 

Identifying Risks: Any cladding used in construction was checked/surveyed.  In the very limited number of cases where similar products were used, the fire strategy for that building was re-visited and sign-off was obtained from the Fire Brigade and client that procedures and fire prevention (sprinkler systems, evacuation procedures and 24 hour on-site presence) were sufficient to enable the building to continue to be occupied safely, pending any permanent solution.
Values Identification: Health & Safety, Reputational: confirmation that the clad buildings within our underlying portfolio are safe to occupy and that fire prevention and evacuation procedures are robust.
Document & Disclosure: Reports from underlying managers disclose any issues and actions being taken.
Active Representation: Immediate engagement with our underlying managers to: initially identify the steps being taken to identify issues; and subsequently ongoing monitoring of their investigations and any remedial action.

2. Breaches to the fire compartmentalisation of hospitals, potentially undermining the safety of the buildings within our infrastructure portfolio

Scope / Processes:  Construction undertaken in a manner which breached the fire compartmentalisation of hospitals ie pipework/cabling installed through walls without any gaps being properly sealed, potentially allowing fire to breach structures intended to block its spread.

Outcomes: 

Identifying Risks: All hospital buildings within the portfolio have been surveyed, and any required remediation work identified and undertaken/scheduled
Values Identification: Health & Safety, Reputational: confirmation that the designed fire prevention measures are robust.
Document & Disclosure: Reports from underlying managers disclose any issues, actions being taken and/or disputes either with the client or the contractors.
Active Representation: engagement with our underlying managers to: initially identify the steps being taken to identify issues; and subsequently ongoing monitoring of their investigations and any remedial action and/or dispute resolution.

3. Issue in our Infrastructure portfolio related to Edinburg Schools / Cavity Walls

Scope / Processes:

In 2016 a gable wall at a school in Edinburgh collapsed in high winds (no injuries).  It transpired that insufficient wall ties/headers had been installed during construction.  We were concerned that the problem might be systemic across the BIIF portfolio of 91 projects and many more buildings. 

Outcomes:

Identifying Risks: 62 projects in the portfolio were inspected and where necessary, intrusive surveys were undertaken.  No major deficiencies were discovered, and any sporadic instances of missing wall ties were or are being rectified.  The buildings are safe to be occupied.
Values Identification: Health & Safety, Reputational: Ensure the structural integrity of the buildings
Document & Disclosure: Reports from underlying managers disclose any issues, actions being taken and/or disputes either with the client or the contractors.
Active Representation: engagement with our manager to: initially identify the steps being taken to identify issues; and subsequently ongoing monitoring of their investigations and any remedial action and/or dispute resolution.

 

 

 

 


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