Sustainability

SIMCo evaluates the sustainability profile of assets at each stage of the investment process using our proprietary ESG framework and scoring methodology, and we proactively engage with our stakeholders on sustainability matters, which we have summarised below.For each fund’s own sustainability policy, reporting and regulatory disclosures, please visit the respective fund websites.

Integration into the investment process

1. Origination

Positive screening is employed to take a more favourable view on companies that fall within one of our three sustainability themes:

·       Renewable energy

·       Enabling the transition to a lower carbon world

·       Infrastructure with social benefits

2. Initial screening

Negative screening is applied to each potential new investment, precluding funds from investing in certain harmful, risky or controversial sectors:

·       Upstream infrastructure related to the exploration of oil and gas

·       Thermal coal mining and directly related infrastructure

·       Power generation from coal

·       Permanent military infrastructure for active operational forces or military production

3. Detailed credit analysis

The SIMCo team gather and analyse due diligence materials, such as environmental assessments, technical reports, and internal policies. Any material or emerging sustainability risks will be identified for review at the Investment Committee meeting and for subsequent monitoring. Further information or a pre-investment sustainability questionnaire may be requested in order to more fully understand the company’s sustainability risks and opportunities.

The asset is assigned an unmodified E score and then a preliminary ESG score is calculated according to our scoring methodology. This gets assessed in the context of the overall portfolios and investment objectives of the fund and is presented in the final credit memorandum, alongside a commentary describing the scoring rationale and any notable sustainability risks.

We firmly believe that the quality of a borrower’s governance influences the risk of lending to it and the likelihood of full and successful repayment. As such, the credit and sustainability teams carry out rigorous due diligence and assessment for good governance at the companies we lend to.

As part of our investment analysis, we will, where relevant and possible, also assess the consequences of different climate change scenarios for our investments. We obtain relevant data from borrowers and third-party providers where primary data is unavailable and continue to evolve this kind of analysis.

4. Investment approval process

Our IC approves or modifies the ESG score and discusses any material sustainability risks or opportunities for the asset. Where appropriate and possible depending on the type of deal, ESG-related covenants may be embedded into loan documentation.

5. Acquisition and monitoring

We formally monitor each investment semi-annually as standard. As part of the monitoring, the IC reviews the investment’s ESG score and any emerging risks or changes that may have occurred. The IC formally reconfirms or updates the scoring based on its review. All borrowers are also sent an annual sustainability questionnaire and engaged with over the course of the year on key sustainability risks, opportunities and topics.

6. Repay and redeploy

The sustainability profiles of investments are considered when discussing portfolio restructuring and disposals. Companies with a low or deteriorating ESG score may be looked at for disposal, whilst decisions are made taking account of financial metrics.

Engagement

SIMCo maintains an open and transparent dialogue with our key stakeholders – shareholders in our funds, borrowers, suppliers, lenders and society. Most of our engagement work focuses on companies our funds, like SEQI and SIDF, lend to.

We deploy a range of engagement strategies designed to encourage and promote sustainable behaviour in portfolio companies, some of which are described below. On occasion and where viable, some of our engagements may be collaborative with other stakeholders or lenders on the deal. If the borrower is unwilling to engage, we may deploy an escalation strategy that could include looking to dispose of the loan. Lenders do not, as a matter of course, have voting rights in the companies they lend to, so this engagement strategy is rarely applicable to SIMCo.

Loan terms

We believe loan terms can be a powerful lever to drive positive impact and behaviour at our borrowing companies with tangible, real-world outcomes. So, where appropriate and possible, we may seek to include covenants or repeated representations to ensure that the borrower complies with its stated sustainability objectives and to encourage it to improve its standards over time.

These could include, for example, obligations to: meet predefined targets; disclose data or enhanced reporting, such as completing our annual ESG questionnaire; or adopt, continue or enhance environmental, social or governance policies.

Sustainability questionnaire

We ask borrowers to complete our annual sustainability questionnaire, which includes questions on the borrower’s overall ESG policies, procedures, progress and oversight, as well as details on specific areas of E (e.g. carbon-reduction initiatives), S (e.g. complaints processes) and G (e.g. internal audit function). There are a range of quantifiable ESG metrics also covered, such as CO2 emissions, health and safety records, and Board independence.

Direct engagement

We seek to maintain a direct dialogue with the management teams of borrowers, or the sponsor where applicable, to discuss sustainability risks and performance and as part of our ongoing monitoring.

We also devise sustainability action plans for assets that identify areas for potential improvement in the borrower’s sustainability credentials, which may form the basis of engagement.

Memberships

The UN PRI

In May 2019, SIMCo signed up to the UN Principles for Responsible Investment. These cover six high-level principles which SIMCo is fully incorporating in its investment processes and decisions:

  1. We will incorporate ESG issues into investment analysis and decision-making processes.
  2. We will be active owners and incorporate ESG issues into our ownership 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 each report on our activities and progress towards implementing the Principles.

SIMCo’s latest reports can be accessed on the UN PRI website. SIMCo is also a signatory to the PRI’s Statement on ESG in Credit Risk and Ratings. More information on this and the company’s recently improved scores can be found here.

In March 2024, we also became a signatory of the PRI’s Statement on ESG in Credit Risk and Ratings. We believe that certain ESG factors may be financially material to a borrower’s creditworthiness and as such support the systematic inclusion of such factors into credit assessments – some examples may include stranded assets linked to climate change, disrupted labour relations, or untransparent accounting practices leading to unexpected losses, expenditure, inefficiencies, litigation, regulatory breaches and/or reputational damage.

We are also members of the Initiative Climat International (iCI) – a PRI collaboration of global private markets players that are supporting the analysis of climate-related financial risks in their portfolios and facilitation of sustainable growth

UK SIF

SIMCo is a member of the UK Sustainable Investment and Finance Association, with the goal of boosting the growth of sustainable and responsible investment in the UK. This is achieved by building a strong and connected UK community, influencing government and regulators, and sharing our collective knowledge of issues and solutions within the sustainable finance sector.

TNFD Forum

SIMCo is a member of the TNFD Forum alongside other institutions aligned with the TNFD’s mission and principles. We participate in consultative webinars and provide feedback on this framework that deals with dependencies, impacts, risks and opportunities that relate to the world’s natural resources and biodiversity – an important and previously overlooked aspect to climate change.

SFDR

Information on SEQI’s sustainability and SFDR disclosures can be found here, and SIDF’s SFDR disclosures are available here.

Winner of the Best ESG Infrastructure Investment Strategy Global 2022 award

Winner of ESG Rising Star 2024 award

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