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Stafford Capital Partners

PRI reporting framework 2018

You are in Strategy and Governance » ESG issues in asset allocation

ESG issues in asset allocation

SG 13. ESG issues in strategic asset allocation

New selection options have been added to this indicator. Please review your prefilled responses carefully.

13.1. Indicate if your organisation executes scenario analysis and/or modelling in which the risk profile of future ESG trends at portfolio level is calculated.

Is this scenario analysis based on a 2°C or lower scenario?

SG 13.1a CC. Pleased describe the resilience of your organisation’s strategy, considering different future climate scenarios.

Strategy affected
Changes to strategy
Description of scenario and time-horizon
How analysis has been used
          Sustainable Capital, Infrastructure, Agriculture
        
          Determination of impacts on the assets and a consideration of the adaption to the characteristics of the investment with greater emphasis on mitigation of risks through consideration of the composition and type of assets that would be resilient to climate change.
        
          Refer to response in 14.2a
        
          Refer to response in 14.2a
        

13.2. Indicate if your organisation considers ESG issues in strategic asset allocation and/or allocation of assets between sectors or geographic markets.

We do the following

13.3. Additional information. [OPTIONAL]


SG 14. Long term investment risks and opportunity

14.1. Describe the process used to identify short, medium and long-term risks and opportunities that could have a material impact on your organisation and its activities.

The Firm has a strong commitment to compliance and risk management in its culture.

The Firm adopts a governance structure that incorporates a three tiers strategic framework. This structure is the core to our risk and compliance framework, reflecting the stategic allocation of responsibilities for risk and opportunties identification, oversight management and mitigation.  They reside at the apex of this structure, maintaining an unconstrained direct relationship with the second tier of committees (Compliance Committee, Investment Committees for each asset service line, ESG Committee, and indepedent external legal counsel). This second tier:

  • develops, recommends and maintains a plan and approach to risk and opportunties;
  • appoints Risk Advocates and allocates Senior Manager personnel from each of the Compliance Committee, the Investment Committee and ESG Committee) deriving a matrix of risk opportunities; and
  • ensures advocates have sufficient authority to educate and pursuade or encourage the Firm's personnel about risks and opportunites.

The third strategic tier strategic are personnel of the various Investment Teams, Fund Operations and material external service providers. In the Firm's prduct and service life-cycles, they are critical in identifying deficiencies, risks and opportunities. Functional separation between investment teams and fund operations ensures complementary but efficacious reflection on risk and enhancements.

14.1 CC. Describe the processes used to determine which climate-related short, medium and long-term risks and opportunities could have a material impact on your organisation and its activities.

The Firm's various Investment Committees for asset service lines each have strict limits and targets cognisant of the type of assets, third party fund specifications, third party manager and geographic concentrations, as well as other specific risk control tools. For example, our Infrastructure, agriculture and sustainable capital service lines apply a comparative analysis of various risk models, such as the S.T.A.R Model, the P.A.R. Model, the Pricing Model, the FX Model and the World Bank scoring methodology for ESG considerations. The risk asset considers at least 9 factors (regulatory, counterparty, contract, revenue viability, competition, technology, financing and other residual ESG considerations). Climate-related short, medium and long-term risks and opportunities are an integral component of the risk assessment process undertaken by the Investment team for their report to the Investment Committees. The data of aggregate comparisons of risks and opportunity ratings are then used to derive a combined likelihood, impact and discount pricing ratings.

These assessments of risks and opportunities then contribute to a distillation of risk and opportunities across the Firm's Investment Committee asset service lines into material and relevant risks and opportunities matrix for the ESG Committee and Compliance Committee.

 

14.2. Some investment risks and opportunities arise as a result of long term trends. Indicate which of the following you act on.

14.2a cc. Please describe how you define “short”, “medium” and “long term”, and describe your material climate-related issues over these time horizons.

Definition
Description of material climate-related issues
Short term
          <1 year
        
          The following table provides the requested overview based on Stafford Infrastructure’s business affected by Climate Change and related issues (Sustainable Capital, Agriculture and Infrastructure)  as an example. In the field for long term, we describe our approach to these issues. 

In this category we regularly have to assess, for example, how much CO2 can 
be reduced by switching fuels for infrastructure assets in our portfolio (i.e., adding wood
pellets to coal-based power plants, switching from coal-to-gas, etc.)

For our Agriculture service line, the issues are:
1. Increasing variability in rainfall patterns impacting yields and, where available, increasing reliance on irrigation water
2. Increasing likelihood of heat stress, impacting yields in row & permanent cropping and livestock
3. Reduced frost hours, impacting flowering and yields (positively and negatively depending on species and timing)
        
Medium term
          >1 and <5 years
        
          We have to deal with mid-term material climate-related issues when modelling prices for 
green certificates for green field renewable energy projects in certain geographies.

For our Agriculture service line the issues are: 
4.	All of points 1, 2 & 3 with potential for increased materiality 
5.	Potential increase in the length and severity of drought and flooding 
6.	Potential increase in pesticide and herbicide usage as ranges of pests and weed shifts in relation to rainfall and temperature patterns
        
Long term
          >5 years
        
          Stafford considers strategic issues as part of its strategy and governance arrangements, which then filter down through the organisation into our culture and how we make decisions. This includes issues such as demographic shifts, political risks and climate change. 

The World Economic Forum produces an annual risk outlook assessment which highlights climate change as one of the key business and investment risks facing the financial and economic system over the coming decade. Stafford is aware of and concerned about climate change as a long-term investor in “real assets” that naturally have a long-term horizon (compared with listed or exchange traded assets). As such, the Firm takes a precautionary approach to positioning the business and investing our client’s assets in a way that is cognizant of the long-term risks and opportunities related to climate change, while also recognising the high uncertainty in the future pathways and actions by policy makers and technology shifts. 

Stafford’s emphasis on sustainability and climate aware investment products is in part a reflection of the Firm’s awareness and attempt to position the business and our investments for the transition to a lower carbon economy that is already unfolding. Indeed, as we have emphasised in our previous responses, sustainable capital, infrastructure, agriculture and timberland are all vital assets to help support and enable the transition that is required, both in developed and developing economies. Stafford is making efforts to support this transition process through these targeted investment products, as well as striving for higher standards of integration and awareness amongst the investment managers of private equity and venture capital funds that do not have an explicit sustainability themed dimension.

As Stafford Capital Partners is focussed on providing Alternative Investment services with the standard term of the underlying funds being 10 years and more, the investments that we pursue tend to be overall long-term in nature.

Long-term material climate-related issues in making investment decisions represent – for example – regulatory changes. Changes in the Feed-in-Tariffs, carbon pricing or market mechanisms and sovereign or governmental decisions have long-term impacts on our investment decisions.

For our Agriculture service line the issues are:
7.	All of points 4, 5 & 6
8.	Potential reduction in groundwater entitlements and ability to access water for irrigation
9.	Potential to change highest and best use of assets as climate regions shift 
10.	Potential increase in plant and equipment costs to shift towards zero emission farming
        

14.3. Indicate which of the following activities you have undertaken to respond to climate change risk and opportunity

14.4. Indicate which of the following tools you use to manage emissions risks and opportunities

14.6. Additional information [Optional]

14.7 CC. Describe your risk management processes for identifying, assessing, and managing climate-related risks.

Please describe

At a high level, risk management processes is reflected in the determination of the short, medium and long term impacts of climate change, as you will see from the answers given in other parts to this section. At a governance and strategy level considerations of risk factor in the design of product lines and the strategic choices for opportunities. 

Stafford considers strategic issues as part of its strategy and governance arrangements, which then filter down through the organisation into our culture and how we make decisions. This includes issues such as demographic shifts, political risks and climate change. 

14.8 CC. Describe your processes for prioritising climate-related risks.

Stafford considers strategic issues as part of its strategy and governance arrangements, which then filter down through the organisation into our culture and how we make decisions. The various Investment Committees of our asset service lines considers common priorities, including issues such as demographic shifts, political risks and climate change, and through consensus adopts a harmonised strategic set of priorities. 

The various Investment Committees are guided by considerations and priorities of others. For example, the World Economic Forum produces an annual risk outlook assessment which highlights climate change as one of the key business and investment risks facing the financial and economic system over the coming decade. Stafford is aware of and concerned about climate change as a long-term investor in “real assets” that naturally have a long-term horizon (compared with listed or exchange traded assets). As such, the Firm takes a precautionary approach to positioning the business and investing our client’s assets in a way that is cognizant of the long-term risks and opportunities related to climate change, while also recognising the high uncertainty in the future pathways and actions by policy makers and technology shifts. 

Thus, through consensus and guidance from reputable and expert organisations, the firms adopts a consensus driven emphasis on sustainability and climate aware investment products. The emphasis driven in part by the distillled priorities and awareness to position the business and our investments for the transition to a lower carbon economy that is already unfolding. Indeed, as we have emphasised in our previous responses, sustainable capital, infrastructure, agriculture and timberland are all vital assets to help support and enable the transition that is required, both in developed and developing economies. Stafford is making efforts to support this transition process through these targeted investment products, as well as striving for higher standards of integration and awareness amongst the investment managers of private equity and venture capital funds that do not have an explicit sustainability themed dimension.

As Stafford Capital Partners is focussed on providing Alternative Investment services with the standard term of the underlying funds being 10 years and more, the investments that we pursue tend to be overall long-term in nature.

Refer to our answers given above in the short, medium and long term considerations. 

14.9 CC. Do you conduct engagement activity with investee companies to encourage better disclosure and practices around climate-related risks?

Please describe


As a fund of fund manager of unlisted assets, the Firm’s engagement activities are carried out directly with our underlying investment managers, who then have direct contact with investee companies. For elevated cases of concern at the individual company level, the Sensitive Business Case process would be utilised to undertake direct engagement with the investee company of concern (as an addition to engagement with the managers).

The Firm's investment process includes a documented monitoring process, including:

  1. Ongoing engagement in the form of telephone calls, site visits, attendance at annual conferences and other meetings to facilitate a deep co-operative partnership with the manager;
  2. Formal annual monitoring adopting monitoring checklists or guidelines, including enquiring about climate-related risks and strategic considerations;
  3. A separate corporate governance review is also performed at least biennial, which includes a review of ESG considerations and incidents;
  4. A follow up on quarterly and annual reports, including those ESG considerations related to progress on climate-related risks.

We also seek positions on various Advisory Boards, thus enabling us to influence outcomes though we only speak for minority interests. In these situations, we gain control or influence over an asset we then work with the manager and where possible renegotiate key fund terms, including preferential disclosure on certain disclosure practices or access to climate-related information.
Case studies during calendar year 2017 reflects the efficacy of this approach to engagement. For example, in the sustainable capital service line we were able to:

  • identify the consequences for our investments in sustainable capital related to the threat by the US administration to withdraw from the Paris Accord;
  • draft a White Paper on the efficacy of investing over the medium and long term on clean energy
  • design collaboratively with key institutional clients and third party managers a strategic allocation for investments into business with sustainability characteristics, including addressing sustainable development goals for climate-related opportunities beyond commonly known clean energy investments.
  • design collaboratively with key institutional clients and third party managers a strategic allocation for investments in infrastructure with resource efficiency and energy efficiency characteristics thereby addressing climate-related opportunities.
  • identify alignment issues on climate-related investing for our institutional clients with third party managers showing a willingness to enhance their investment ethos to help address those climate-related goals.
     

14.10 CC. Describe how you use data from climate-related disclosures.


Data disclosed, whether actively procured by us or through the normal disclosure process, contributes to:

  • risk mitigation and opportunity identification or tracking;
  • indication of how an organisation is assessing and managing climate-related risks and opportunities, including its governance arrangements and its strategic priorities, risk management processes and the metrics and targets that it includes in its disclosure
  • product or service lifecycle stages related to design, delivery and incident management;
  • product development and design for the Investment Committees, including deriving investment pipeline, supporting thesis for strategic allocations and investment guidelines;
  • ESG knowledge base capture for the ESG Committee for tracking issues, benchmarking third party managers and product development.
  • In the case of timber, investments are regularly made in jurisdictions where carbon is priced (e.g. New Zealand and the United States where the California cap and trade scheme allows forest carbon offsets) and is regularly reported as a balance sheet item. In these cases, the value of carbon is reported to investors and Stafford actively uses this data to forecast investment returns.

 


SG 15. Allocation of assets to environmental and social themed areas

New selection options have been added to this indicator. Please review your prefilled responses carefully.

15.1. Indicate if your organisation allocates assets to, or manages, funds based on specific environmental and social themed areas.

15.2. Indicate the percentage of your total AUM invested in environmental and social themed areas.

69 %

15.3. Specify which thematic area(s) you invest in, indicate the percentage of your AUM in the particular asset class and provide a brief description.

Area

Asset class invested

6 % of AUM

Brief description and measures of investment

We have specifically themed funds known as "sustainable capital", but whose predominant investments are in clean technology. 

Our infrastructure assets are diversely invested but with a focus on infrastructure and related investments clean technology. 

Asset class invested

45 % of AUM

Brief description and measures of investment

Stafford Timberland has a discretionary mandate to invest in assets in key regions of the world.  Stafford Timberland has approximately 2.25 million hectares of timberland Area Under Investment (or USD 2 billion AUM) across a global footprint that spans primarily the United States, Australia, New Zealand and Latin America.  Approximately 98% of Stafford Timberland's Area Under Investment comprises forests certified to an FSC, PEFC or other leading forest management standard.  The remainder are generally only uncertified due to cost prohibitiveness (mostly due to being small scale properties) or because they are currently in the process of becoming certified.  As a result, sustainability is a core part of Stafford's approach to responsible investment in the timberland asset class.

Asset class invested

1 % of AUM

Brief description and measures of investment

A small mandate with discretion to invest in agriculature / farmland with demontrable characteristics of sustainable agriculature. 

Asset class invested

3 % of AUM
1 % of AUM

Brief description and measures of investment

As above, we have themed in sustainable capital, some investments into social enterprise and community investing. 

Our infrastructure funds and mandates are invested into some social enterprises and community related infrastructure. 

We have venture mandates whose portfolio themes have a required focus on social enterprises and community investing. 

Asset class invested

1 % of AUM

Brief description and measures of investment

Broad ranges of portfolio companies and enterprises that are within these sustainable categories across our funds and mandates despite those funds / mandates not possessing a themed focus. 

As above, our sustainable capital funds and mandates are required to make investments in broad range of sustainable enterprises, including investing into enterprises within the educational sector or servicing those other enterprises in education. 

Asset class invested

1 % of AUM

Brief description and measures of investment

As above. 

Asset class invested

1 % of AUM

Brief description and measures of investment

As above. 


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