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A Futuregrowth ESG case study

IN A NUTSHELL

  • ESG screening is a crucial aspect of the investment process.
  • Sustainability is key to understanding risk.
  • Engagement is a powerful aspect of gauging opportunity.
  • We are able to influence our investment partners to drive positive change.

An effective investment strategy is all encompassing and should not be based solely on the financial assessment of a transaction. The inclusion of environmental, social and governance (ESG) screening is thus crucial in the assessment of any potential investment and underpins a sustainable investment case.

Futuregrowth’s responsible investment strategy focuses on integrating ESG factors into the investment process. This includes investment screening, financial analysis and management engagement. We recognise that in the complex financial environment in which we operate, there is no one-size-fits-all solution to analysing companies for sustainability issues, and note that there will be variances in our approach.

Understanding risk

In order to fully understand the risks associated with an investment opportunity, we consider a range of investment criteria during the due diligence process.

Our mandate is to be a long-term funding partner and, as such, we view sustainability as key to understanding the risks associated with a particular investment. For this reason, ESG integration – although a critical measure of sustainability – should not be a stand-alone process but should form part of the larger analysis process.

Unlisted investments

ESG analysis involves performing detailed due diligence on a company’s policies, actions and processes. Management engagement is one of the key ways we assess an investment and determine whether the current controls in place support responsible business practices.

It is for this reason that we structure the majority of our unlisted loans internally and thus have dedicated and experienced analysts who take the time to fully understand a business, and are able to successfully negotiate terms that are mutually beneficial to both parties. In our experience, these types of investment opportunities provide us with enhanced protection measures, as opposed to the terms available to investors in the listed market.

Last year, we were considering an investment opportunity presented by a South African pork producer. We had an opportunity to engage with this privately owned company on their factory farming practices and, in particular, on the topic of the humane treatment of pigs.

Despite the financial standing of the company in question, our point of departure for the industry (and this transaction) was our support of the principles outlined in the World Organisation for Animal Health and GLOBALG.A.P*. These principles are founded on the ideals of high standards of animal welfare and good agricultural practices.

As part of our investment due diligence process, we took time to understand the company’s view, policy and practices around supplier requirements, factory farming standards and slaughter processes. These were then considered in relation to established standards. In addition to this, we explored sustainable change and alignment with industry best practice standards for farmed animals for the company itself, and also along the supply chain.

We concluded our due diligence and credit approval process towards the end of 2014, with the first draw under the facility taking place in the first quarter of 2015. The following is a highlevel summary of the issues considered:

Case study

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Supporting high standards

It is our philosophy to invest in sustainable businesses on behalf of our clients. Furthermore, we believe that we should be a long-term partner, and as such we believe that given our role, we are able to influence our investment partners to consider all aspects of their business practices, particularly if some processes do not measure up to “best practice”. Futuregrowth is committed to managing its investments in a responsible and sustainable manner. In doing so, we believe that we are able to contribute positively to the long-term success of our business and deliver on our client promise to provide sustainable returns that contribute to pension funds’ long-term return objectives, risk tolerances and mandates.

*G.A.P: Good Agricultural Practice

AUTHOR

Angelique Kalam
Manager, Sustainable Investment Practices, Futuregrowth Asset Management

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+27 21 509 5022

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