Each potential new investment will be screened through negative and thematic screenings and its E Score (or estimated ESG Score) assessed in the context of SEQI’s overall portfolio and current investment objectives. Only then will the potential investment be admitted to the next stage of the investment process which is full credit analysis and documentation.
1. Initial screening
2. Detailed credit analysis and documentation
After a potential investment has received a satisfactory unmodified E-Score, it will be assigned to a deal team for full due diligence and credit analysis. During this stage, each deal team will now be asked to calculate a preliminary ESG Score which will be presented, discussed, and ultimately ratified at the final investment committee. The deal teams will also identify any material or emerging ESG metrics/KPIs that will be monitored as part of the semi-annual monitoring process.
To facilitate the ESG scoring, each deal team will start gathering and assessing the ESG credentials of the transaction (through pre-investment ESG questionnaires, environmental DD reports, technical DD reports, etc.). Additionally, borrowers will be provided ESG questionnaires to help assess any existing or potential ESG risks of each transaction, as well as any mitigants to those risks. Further DD material can then be requested by Sequoia in order to further understand the extent of the issues identified as well as how to address them.
Depending on the type of private debt deal in which Sequoia is involved (i.e. whether investing in a syndicated or bilateral loan), we may be able to take proactive measures during the documentation stage to enhance the ESG profiles of certain investments. Such measures can specific environmental or other goals, or governance-related conditions subsequent when deemed reasonable and appropriate.
The final ESG Score will then be presented in the final credit memorandum, with commentary describing the scoring rationale and any unique ESG considerations that warrant further discussion.
3. Investment committee
The final ESG Score will either be approved or modified by the Investment Committee at the final investment committee meeting, which will then be documented in the meeting minutes
4. Acquisition and ongoing monitoring
Borrowers will also be required to complete annual post-investment DD questionnaires that will allow Sequoia to ensure that the transaction’s ESG credentials are maintained or improved. Such questionnaires will comprise of quantifiable ESG metrics/KPIs when appropriate, such as CO2 emissions, Health and Safety records, CQC ratings, etc.
ESG performance and credentials will be also monitored regularly for each investment in the semi-annual monitoring process. During the due diligence phase, the deal team would have identified any material or emerging ESG issues for each transaction and these will then be monitored in order the assess the ESG performance of each asset and the overall portfolio.
Sequoia will then contact the management of any transaction with deteriorating ESG scores in order to work with management to improve the ESG performance of the investment. If this strategy does not prove efficient, depending on the gravity of the situation, Sequoia will either dispose of the asset or add it the runoff portfolio.
The UN PRI
In May 2019, Sequoia signed up to the UN Principles for Responsible Investment. These cover six high-level principles which Sequoia is fully incorporating in its investment processes and decisions:
- We will incorporate ESG issues into investment analysis and decision-making processes.
- We will be active owners and incorporate ESG issues into our ownership policies and practices.
- We will seek appropriate disclosure on ESG issues by the entities in which we invest.
- We will promote acceptance and implementation of the Principles within the investment industry.
- We will work together to enhance our effectiveness in implementing the Principles.
- We will each report on our activities and progress towards implementing the Principles.