Responsible Investing
Environmental, Social and Governance Policy
Introduction and Statement of Principles
From our inception, Penfund has always believed in being a good corporate citizen, focused on doing right by our investors, private equity sponsors and portfolio companies. Not only is this the right thing to do, but we believe it is simply good business. We have always believed that by being honest, forthright and easy to work with, stakeholders will continue to work with us in the future.
Our approach to environmental, social and governance (“ESG”) considerations is entirely consistent with the foregoing. As an institutional investor, we have a fiduciary duty to act in the best interests of our limited partners. In this capacity, we believe that ESG issues can affect investment performance. As the United Nations Principles for Responsible Investment (“PRI”) recognize, ESG can have varying degrees of impact across companies, sectors, regions, asset classes and time. At Penfund, we believe that having a full understanding of any investment opportunity means understanding how ESG factors may impact a particular investment. Anything less would not only increase investment risk, but would also be inconsistent with our long-held principles.
Our ESG policy explains: (i) how we formulated our ESG policy; and (ii) how ESG considerations are factored into our business.
About our Policy
According to the PRI, responsible investing is an approach to managing assets under which investors include ESG factors in: (i) their decisions about what to invest in; and (ii) the role they play as owners and creditors. The PRI is widely viewed as the leading framework for advancing responsible investing, and we are proud to be a PRI signatory. Our ESG policy is therefore based on and, we believe, consistent with the PRI.
The applicability of specific ESG factors will depend on the context. Common examples include:
- Environmental. Climate change; resource depletion; waste; pollution; and deforestation.
- Social. Human rights; modern slavery; child labour; working conditions; and employee relations.
- Governance. Bribery and corruption; executive pay; board structure; political lobbying and donations; and tax strategy.
To most effectively implement the PRI at Penfund, we follow the incorporation approach, specifically via integration. This means that we explicitly and systematically include ESG factors in our investment analysis and decisions, with the aim of managing risks and improving our investment decisions.
We believe that for our ESG policy to be most effective, it must be embraced by the entire firm. Accordingly, every member of the Penfund investment team and our COO have completed training from the PRI Academy. We also have a formal ESG committee that is responsible for this policy and for ensuring compliance with this policy. All members of the committee have completed PRI Academy training.
Policy in Practice
We believe that ESG must be considered in every investment decision that we make. Consideration of ESG factors is therefore part of every diligence process. The same investment team that considers and evaluates the company’s industry, business and financials is also responsible for considering any relevant ESG factors.
No investment will be made without an assessment of ESG factors. To that end, every investment memo we distribute will contain a summary of our assessment of ESG factors. The investment team’s evaluation will begin with a standardized checklist of ESG factors to consider. Importantly, we recognize that every deal is different and the checklist is only a starting point. In our view, our ESG analysis is a means of identifying potential investment risks in a systematic way. The checklist is therefore an aid in this process, and not the sum of the process.
Each category on the checklist will be graded as to whether it poses a low, medium, or high risk. In addition, the deal team will always evaluate whether there are any additional factors that merit consideration. Depending on the answers to the checklist questions, further diligence may be necessary. This may include, among other things, further discussions with the private equity sponsor, further discussions with management and third-party research.
No investment will be made if the investment team, investment committee and ESG committee are not satisfied with the outcome of the ESG evaluation.
As the PRI recognizes, credit investors typically have little control or influence over the operations of portfolio companies, thus making the initial ESG assessment, prior to investing, all the more critical. On an ongoing basis, the Penfund investment team will monitor the company’s ESG factors, just as they monitor its financial performance. Any negative developments will be appropriately addressed with the private equity sponsor, management or third-party consultants, as applicable. As with the initial investment decision, Penfund will not provide additional capital where we are not satisfied with the evolution of ESG factors at a portfolio company.
We will review this policy on annual basis and make any updates or changes as appropriate.
