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Ashmore Group plc

PRI reporting framework 2020

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Pre-investment (selection)

PR 04. Incorporating ESG issues when selecting investments

04.1. Indicate if your organisation typically incorporates ESG issues when selecting property investments.

04.2. Provide a description of your organisation`s approach to incorporating ESG issues in property investment selection.

Considering the construction sector globally represents more than 50 percent of the world’s wealth, is one of the largest sectors in terms of economic output and employment, and has a considerable environmental impact - it accounts for 36% of the global energy consumption and accounts for up to 39% of all CO2 emissions; the integration of ESG factors is vital for our investment practice.

To make ESG integration consistent throughout our investment process, we have a three steps check of ESG risk and impacts at the individual project level. First, the structuring team assesses the ESG risk level of an investment based on the IFC exclusion list, the project’s characteristics and the AAIF. Secondly, the ESG team conducts in depth diligence on the proposed project site and development partner. Finally, the investment committee makes decisions considering the ESG information presented by the structuring and ESG teams. All three steps involve the participation of either the ESG team or taskforce, as described below.

A. Initial Screening and Notification

The first step is the Initial Screening and Notification process for new projects, which determines the extent of environmental and social due diligence required. The ESG workforce reviews all pertinent documentation provided by the prospective partner, as well as additional relevant sources including public records and databases. With that information, the team assigns an Environmental and Social (E&S) risk category, using an approach consistent with the International Finance Corporation (IFC) Performance Standards.

We evaluate the potential risk of a project on a case-by-case basis, and the E&S risk categorization system enables us to monitor and evaluate our potential exposure to environmental and social risk aggregated at the portfolio level:

Category A Projects: are likely to have significant adverse environmental and/or social impacts that are irreversible, sensitive, diverse, or unprecedented. In the absence of adequate mitigation measures, Category A Projects are considered high risk. Example, large developments in sites of significant environmental importance or where resettlements of large groups of people are required.

Category B Projects: are likely to have limited adverse environmental and/or social impacts, are generally site-specific, largely reversible and readily addressed through mitigation measures. Category B Projects are considered medium risk. Include, but are not limited to, small to medium scale housing of up to 2,500 units in non-sensitive environmental areas, and retail developments in urban infills.

Category C Projects: are likely to have minimal adverse environmental or social impacts. Include land acquisitions to be sold after obtaining urbanization and/or licenses/ permits.

Additionally, the structuring team reviews the E&S risks of a proposed project or partner according to the following:

• If a project involves an excluded activity as listed in the IFC Exclusion List, it will not be considered for investment

• If a development partner has a history of environmental and social incidents that have not been adequately managed, it will not be considered for partnership

All findings during the preliminary investment appraisal are documented and a summary of key risks and opportunities is detailed in the investment memorandums reviewed by the Investment Committee.

Subsequently, in cases where environmental and social issues are identified, corrective actions according to the impact hierarchy proposed by the IFC will be stipulated in agreement with the development partner. We monitor the progress of the corrective actions as well as the E&S performance of the projects throughout their execution.

B. Due Diligence

After all ESG risks have been categorized and documented, we define the appropriate due diligence required by risk level:

• Review of E&S good standing, E&S compliance, and property rights for proposed development site (All Categories). Regardless of the sourcing of the proposed project (i.e. in-house sourcing, project presented by known partner or by potential partner), the due diligence process begins with a desktop review or a visit to the competent authorities to assess previous or current social and/or environmental disputes involving the proposed development site. At a minimum, the review includes previous and current land use, property rights clearance, current occupancy and terms, and environmental sanctions.

• Review of the development partners' track record on E&S issues including potential non-compliance with national regulations or negative publicity (Categories A and B). We have developed long-term relationships with well-established development companies and currently work with trusted partners. Nonetheless, as part of the environmental and social due diligence process we conduct a thorough review of a potential partner's track record including but not limited to compliance with environmental and social laws at the local and national level including previous sanctions, and existence of environmental and social policies and initiatives including Environmental and Social Management System (ESMS).

• Review of the development partners' performance against international standards or industry best practices regarding environmental and social issues (Categories A and B). In order to achieve superior risk adjusted returns through our development projects, we look for best-in-class partners who are specialist in our projects' asset types and align with our social and environmental commitments.

• Review of the development partners' actions to mitigate potential environmental and social issues associated with operations (Category A only). When reviewing the track record of a prospective partner we assess the previous actions taken and mitigation plans designed when considering E&S issues. We conduct a desktop review of the legal documentation of environmental and social management plans for previous projects of large scale. We categorize large scale as development sites over 10 hectares, residential developments more than 2,500 units, large retail developments in urban locations, and projects where local regulations require environmental and social surveys and mitigation plans.

• Site visit to the proposed project site (All Categories): As part of the project due diligence, we conduct site visits to gather additional information and corroborate/contrast the findings of the desktop review as described above.

Upon completion of the due diligence, its findings, conclusions, and recommendations are presented in an Environmental and Social Due Diligence report (ESDD). The recommendations include the actions required for the proposed investment to proceed to closure. These describe the contractual mitigation, management and, monitoring measures required.

04.3. Indicate which E, S and/or G issues are typically considered by your organisation in the property investment selection process, and list up to three examples per issue.

Environmental example 1, description

          The construction sector intrinsically generates contamination due to the nature of its activities. Therefore, we assess the magnitude of our investment projects as a proxy for the level of contamination they could generate and the projects implement the necessary mitigation measures to reduce particulate matter emissions associated with the construction materials dust dispersal. This helps us to prevent impact on the surrounding environment and our employees and communities’ health.
Additionally, when the activities, conducted in a proposed project’s lot, were industrial or commercial, or a change in the lot use is required, we analyse the state of the soil to define if there is any possible environmental liability that could prevent the development of the project. 


During 2019, we analysed a project to be developed in a lot that was previously a gas service station. Therefore, the possibility of having contamination in the soil was high. Considering this, we determined that after the dismantling and decommission of the station an additional study of soil contamination was needed to evaluate the condition of the lot as any environmental liability would be the responsibility of the original lot´s owner and the decontamination of the lot was a precondition for the investment. In this sense, the risk analysis and the inclusion of ESG aspects in our investment selection process alerted us about the environmental risk associated to the investment and gave us the tools to find mitigation measures and contractual conditions to protect our investment and the community.
        

Environmental example 2, description

          Considering the high amount of construction materials needed for real estate developments, the inclusion of adequate waste management processes is important for the proper execution of our projects for three main reasons. First, the high volumes of C&D waste produced need a proper and timely disposal that ensures it does not linger in the construction site becoming a hazard to the workers’ health and safety. Secondly, proper disposal of construction waste assures useful materials are reused and recyclable elements are sent to the appropriate recycling centers. Thirdly, having a waste management process assures the small amounts of hazardous waste produced on site are disposed of on a way that reduces risk to people and environment. 

During due diligence, we consider the location of the project and the availability of public services including municipal waste collection. Additionally, the capacity of the project to manage the C&D, hazardous waste and recycling elements.  

We track the monthly waste volumes and the recycling and reusing rates in all our portfolio projects. This in order to analyse their performance throughout their various execution phases.
        

Environmental example 3, description

          During the investment selection process we analyse the characteristics of the lots we are going to develop, which includes the analysis of access to public services such as water. If a project does not have the possibility of availability of aqueduct services, it is not considered for investment. In some cases, some additional investments, such as pipelines, tanks and pumps among others, are needed to assure the water supply to the project hence a financial analysis is conducted to determine if the investment is viable.

Additionally, we track water consumption in all projects to make sure efficiency measures are transferred throughout our portfolio. This becomes critical to the project's execution in periods of drought and in areas of high water stress.
        

Social example 1, description [OPTIONAL]

          During the due diligence process we assess the occupational health and safety performance of our development partners to identify possible weaknesses that can interfere with the development of the project or could be a risk for the employees, environment and surrounding community. If we identify gaps between the development partners’ performance and the AAIF we stablish contractual conditions to fill those gaps as precondition for investment. 

In order to monitor and manage occupational health and safety (OHS) at the project level, there is a dedicated OHS and Environmental professional in each construction site who has the primary responsibility for all E&S matters. Those professionals oversee compliance with the local regulations and the AAIF in terms of:

-	OHS programmes: Programme for corrective, preventative and improvement in OHS actions; Programme for safe work in heights and protection from falling objects; Programme for the management of mechanical risks; Programme for chemical risk management; Programme for the management of activities with the presence of electrical risk; Epidemiological surveillance programme in musculoskeletal disorders; Psychosocial risk management programme, and Prevention programme for drug and alcohol use, among others.
-	Training: there are monthly training sessions regarding OHS and environmental aspects. Each development project has a training schedule according to its scale and ESG risks.
-	Machinery maintenance: each day before activities begin there is a preventive revision of all machinery in the construction sites. Additionally, a specialised maintenance schedule is conducted according to the manufacturer's specifications to ensure the proper performance of the equipment. 
-	Use of personal protective equipment: When a new employee joins the construction site all PPEs are delivered and an induction is conducted to teach workers their proper use. Each day all PPEs are preventively assessed to ensure all of them are in good condition. Once a PPE is damaged or suspected to be damaged it is decommissioned and replaced.
-	OHS committee, including representatives from both management and workers. The committee promotes and monitors the occupational health and safety standards and addresses workers' complaints or grievances.
        

Social example 2, description [OPTIONAL]

          In the markets where AshmoreAVENIDA has presence, there is a deficit in quantity and quality of housing, especially for low-income segments. Currently, in our biggest markets, the lowest income population is the one paying more for housing as a proportion of its available incomes, which oblige this population to live in remote locations or in overcrowded homes. Considering this and our responsible investment strategy, low-income housing is a strategic opportunity for us to supply good quality housing and improve conditions in the areas where we invest. Additionally, considering our alignment with the SDGs, we design projects in prime locations close to public transport, which could benefit future residents through shorter commutes, urban renovation and economic synergies. 
In our current portfolio, we are developing 43,587 residential units of which 73% are low-income benefiting over 40,000 people. During 2019, we included two new low-income projects to our portfolio that will offer about 1,200 new units.
        

Social example 3, description [OPTIONAL]

          We comply with all building, fire and life safety, and earthquake resistant codes in the markets where we invest, and complement them whenever possible with international standards beyond the local codes. That is the case of the application of the National Fire Protection Association of the United States (NFPA) standards. Considering this we include building safety practices during our due diligence process.
        

Governance example 1, description

          Our policy of corporate governance considers three possible conflicts of interest: corporate, employees and clients as well as measures to mitigate the effects of those. During the due diligence process, we evaluate possible conflicts to assure neither the prospect development partner nor the project have any conflict of interest that could affect the investment.  
Regarding corporate conflicts there is an advisory board in charge of approval of corporate strategy, conflicts policy, and induction program to ensure familiarity with our business and products. In terms of employees conflicts the company has an employee handbook, a regular compliance monitoring of the personal account dealing, and a policy for expenses approval. Finally, the Fund board and an external auditor handle the conflicts of interest with clients.
        

Governance example 2, description

          AshmoreAVENIDA has a governance structure with clear standards to manage the fund and projects in a systematic way. In terms of our projects, we consider each one is an independent transaction and separate legal entity; therefore each one has a Management Committee, which is the main decision-making body in charge of the overall execution of the project including technical, financial and ESG aspects. During the diligence process we review, our development partner also has a governance structure aligned with our standards.

In order to achieve asset segregation at the portfolio level, we use a Trust structure, required for residential projects by the local regulatory regime, and implemented as best practice for all other project types when not required. This system standardises investment processes, increases transparency and protects the buyers of the units we develop. Its major functions include treasury management and administration of payments. The Trust system is managed by national independent regulated organisations.

The Trust system achieves among others:
-	Buyer confidence: Capital is only released to developer when break-even pre-sale target of 60-70% has been reached, providing confidence to buyers that payments are safe and projects will be completed.
-	Asset Segregation: Funds are segregated and can only be used for a specific development project. Parties involved in the transaction agree on the terms whereby capital and profits are used and distributed, having the Trust as a transparent entity in between.
-	Efficiency: Each enterprise is managed by professionals linked to accounting, treasury and administrative activities. There are standard fees, with full disclosure of project budgets.
-	Supervision and Monitoring: All enterprises are supervised by SFC, Colombian equivalent of the SEC.
        

Governance example 3, description

          During due diligence we evaluate if our potential development partner complies with our anti-bribery and corruption policy. Additionally, we review the partner is not part on any risk list or has a non-compliance history with local, regional or international AML standards.
        

04.4. Additional information. [Optional]

Our due diligence process is a systematic and robust analysis that considers the IFC performance standards and local regulation. Our investment strategy is executed including specific environmental and social standards, which are implemented considering the potential risks and impacts of each particular project according to the following:

Tier 1 Projects: retail development projects over 6,000 square meters of built area; greenfield residential development projects over 2,500 units; projects that are located in areas of high environmental risk or areas designated as protected for conservation by local authorities; or projects that require the relocation of large numbers of people.
Tier 2 Projects: retail development projects below 6,000 square meters of built area, and small and medium scale residential development projects in urban infills containing fewer than 2,500 units.

 

Environmental Standards:

Use of Resources: A tier 1 projects is required to include in its design, minimum amounts of energy and water to be saved when compared to its corresponding climate zone benchmark. These amounts are defined by project type and the location of the development site.

Pollution Prevention: Considering the construction sector has the potential of generating contamination due to the dispersal of construction materials, all of our projects have pollution prevention programmes to protect the environment and the sourronded communities. The programme includes diverse mitigation measures and good practices to reduce the pollution.

We recognise that protecting and conserving biodiversity, maintaining ecosystem services, and sustainably managing living natural resources are fundamental to sustainable development. Therefore, we act as a steward of the biodiversity and living natural resources in the locations, ecosystems and communities where we operate, and act appropriately consistent with IFC Performance Standard 6 to:

- Protect and conserve biodiversity
- Maintain the benefits from ecosystem services
- Promote the sustainable management of living natural resources through the adoption of practices that integrate conservation needs and development priorities

We also recognise that the conservation of living natural resources is a systemic effort and engage business partners and third party organisations, when appropriate, to collectively look for innovative approaches to achieve the aforementioned objectives. AshmoreAVENIDA has adopted a footprint minimisation principle throughout the life cycle of its development projects and avoids development projects located in critical habitats either natural or modified. In cases where avoidance is not possible, the project must comply with all the requirements of Performance Standard 6 and include a Biodiversity Action Plan that achieves a net gain in biodiversity for that critical habitat. For that purpose, we can retain or ask development partners to retain specialists and experts that provide professional opinions as to the designation of critical habitats. Expert opinions about conservation and critical habitats are required for all Category A projects as defined in our AAIF.

 

Social Standards:

We take into account in all projects the social considerations of the IFC Performance Standards as follows:

Labour Relations: In terms of labour relations, we adhere to the IFC Performance Standard 2 and comply with all national, regional and local laws including but not limited to the areas of:

1) Working Conditions and Management of Worker Relationship:

a) Human Resources Policy

b) Working Relationship

c) Working Conditions & Terms of Employment

d) Workers’ Organisations

e) Non-Discrimination & Equal Opportunity

f) Retrenchment

g) Grievance Mechanisms

 

2) Protecting the Workforce:

a) Child Labour

b) Forced Labour

 

3) Occupational Health & Safety

4) Workers Engaged by Third Parties

5) Supply Chain

 

We work with development partners to make sure their own internal policies with regards to labour relations are consistent with the principles and practices of the AAIF. We take reasonable efforts to ensure that third parties that hire workers that perform tasks critical to our business purposes, are reputable and legitimate enterprises and have appropriate labour practices.

Community Health, Safety, and Security: we recognise that projects’ development activities and equipment can increase community exposure to risks and impacts. Therefore, we implement pertinent measures to avoid or minimise the risks and impacts to community health, safety, and security that may arise from project related-activities, with particular attention to the risk posed to vulnerable groups according to the IFC Performance Standard 4. This includes safety standards and guidelines when hiring security companies including: appropriate training; a code of conduct for the use of force with or without firearms; ways to prevent and resolve conflicts without using force; grievance mechanisms related to possible abuses in the use of force; and internal assessment systems to review the performance of private security companies.

Involuntary Resettlement: We avoid projects that will likely result in displacement and/or involuntary resettlement, and where involuntary resettlement is unavoidable, will minimise it by taking appropriate measures to mitigate the adverse impact on the displaced persons and host communities through a carefully planned and implemented strategy according to Performance Standard 5 of the IFC Performance Standards.

Indigenous Peoples' Rights: In order to protect Indigenous Peoples’ rights in accordance with international frameworks including the UN Human Rights Conventions, the UN Declaration on the Rights of Indigenous Peoples (UNDRIP), and all applicable laws and regulations in our target markets, we avoid projects that will likely have an adverse impact on Indigenous Peoples’ communities, or where avoidance is not feasible, will minimise and/or compensate for these impacts according to Performance Standard 7.

Cultural Heritage: We recognise the importance of cultural heritage for current and future generations and consistent with the Convention Concerning the Protection of the World Cultural and Natural Heritage, we protect cultural heritage in the course of our project activities per Performance Standard 8. We avoid adverse impacts that development projects might cause to cultural heritage and also consider chance find procedures as part of a project’s design.

Through the due diligence process, we assess the performance of business partners regarding the management of environmental and social risks and impact. We work with them when necessary to strengthen their own Environmental and Social Management System (ESMS) so that they fully integrate the considerations of the IFC Performance Standards and align with the principles and practices of our AAIF.


PR 05. Types of ESG information considered in investment selection (Private)


PR 06. ESG issues impact in selection process

06.1. Indicate if ESG issues impacted your property investment selection process during the reporting year.

          ESG issues affecting the timing of the disbursements of portfolio projects 
ESG issues guided portfolio allocation strategy
        

06.2. Indicate how ESG issues impacted your property investment deal structuring processes during the reporting year.

          ESG issues impacting the timing of the disbursements of portfolio projects
        

06.3. Additional information.

ESG integration is part of the overall decision-making process for potential portfolio projects and forms an integral part of the considerations presented to the Investment Committee. Thus, the analysis of ESG aspects is critical to identify risk and opportunities, determine the viability of the projects and define the contractual conditions for investment with development partners.

Regarding the identification of risk and opportunities, our ESG due diligence process, regulated through our AAIF, helps us to assess the magnitude of possible material risks and our development partners’ capabilities to avoid or mitigate them. Thus, our ESG due diligence process can lead to the rejection of potential portfolio projects. Our ESG analysis has prevented us investing in projects with deal breaking conditions including impact on indigenous communities, the presence of sensible water ecosystems and cultural property impacts we were not able to mitigate among others. When we identify it is possible to avoid or mitigate the risks in ESG areas uncovered during diligence we establish contractual conditions in the investment agreements sufficient to ensure the mitigation of those risks. These contractual conditions could modify the payments schedule or the timing of disbursements of the projects based on ESG milestones. Those ESG covenants also have the potential to improve the overall project's performance by including policies or mechanisms stated in our AAIF such as: grievance mechanisms for communities and workers in the construction sites, stronger labour policies, monitoring tools for water and energy consumption, waste and recycling volumes, dedicated professionals to occupational health and safety standards, and fire and life safety requirements above those of the local regulation.

For instance, project level diligence can help us identify risks and mitigation measures in areas such as soil and water contamination, biodiversity, community health and safety, labour relations and cultural property impact among others. In addition to the risk management framework through which we conduct due diligence, our AAIF allows us to uncover opportunities to create additional value in ESG areas. For example, the analysis of a surrounding community can show us the need for affordable housing and the preeminence of female head of household, which can in turn inform our commercial strategy while boosting the positive impact of the project.


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