EdenTree Investment Management: Clean water, energy and climate change | Case study

EdenTree Investment Management

Type of signatory: Investment Manager

HQ Location: London

Assets under management: £3.7 billion

Covered in this case study

Asset classes): Fixed income

Geography: Global

Sector(s): Utilities, Water

EdenTree launched one of the first ethical investment funds in 1988, and our responsible investment approach has since focused on four pillars: research, selection, engagement and governance assessment. Through these, we seek to catalyze positive change and encourage best practice in the companies in which we invest. In this case study, we describe how our approach helps support the United Nations Sustainable Development Goals (SDGs) and demonstrate how we applied it in the analysis. of a bond issued by Severn Trent.

Why we focus on SDG results

With global consumer preferences increasingly influenced by sustainability, the demand for tangible impact metrics is growing. We are also aware that sustainable development requires a large amount of funding, of which it lacks.

From 2022, the UN estimates that there is an annual financing gap of US$3 trillion to US$5 trillion to achieve the 17 SDGs by 2030.

Our investment approach aims to generate positive, measurable results for people and planet, alongside market-competitive financial returns, by focusing on solutions to the world’s most pressing sustainability challenges, such as the education, health and welfare and social infrastructure.

This is a central objective of our Global Impact Bond Fund, where we focus on the positive impact generated by corporate debt issuers, primarily by investing in ESG-labeled bonds and unlabeled bonds that can help finance tangible sustainable results.

How we focus on SDG results

Our Global Impact Bond Fund aims to achieve its impact objectives in a disciplined and transparent manner. This includes performing a holistic analysis of bond issuers using our proprietary impact assessment framework, combined with extensive fundamental credit research (see Figure 1).

Figure 1. The EdenTree Global Impact Bond Fund investment process

Our impact assessment framework builds on established frameworks developed by organizations such as the Global Impact Investment Network, the Impact Investment Institute and the Principles for Responsible Investment.

Impact investing in public debt remains relatively new, but the universe of instruments in which we can invest that are linked to projects designed to generate positive results is expanding.

While our ability to influence issuers’ contributions to the UN SDGs is somewhat limited as bondholders, we are committed – as responsible investors – to generating positive results through active ownership. This includes applying our impact criteria to the issuer, not just the investment instrument.

In our Global Impact Bond fund, we focus on three widely accepted pillars of impact investing: intentionality, contribution and measurement, while paying careful attention to any potential negative impact:

  1. We start by evaluating the intentionality of a possible investment. The issuer must have clear objectives as to the impact the bond aims to generate. We consider the stakeholders that the issuer identifies when formulating environmental and/or social objectives, as well as the ambition attached to the corresponding targets.
  2. We also assess the value of an issuer contribution, seeking to establish whether the planned projects a) address a need for sustainability that might otherwise not have been met; and b) target (ideally) underserved communities or individuals. We ask which SDGs, if any, the issuer has sought to contribute to by deploying the product of this investment instrument, and which underlying SDG objectives it has identified.
  3. The desired results must also be measurable – issuers must commit to regularly publishing tangible and comparable non-financial key performance indicators (KPIs) among peers and/or with the wider industry, where possible.
  4. Finally, we believe it is imperative that issuers seeking to generate positive results operate responsiblyworking to mitigate the negative impacts resulting from their broader business activities.

As such, we expect issuers to address potential adverse consequences across their operations, covering the following areas: business ethics, corporate governance, community, employment and labor, environment and climate change, and human rights. of man.

We also integrate value-based filtering[1] in our no-harm analysis (see categories highlighted in Figure 2). We aim to ensure that the results generated by the issuer are indeed positive, especially since the recourse is generally to the issuer rather than to the specific projects.

In our impact analysis, we divide investments into four categories: fail, underneath medium, mediumand above medium. We rely on a variety of quantitative and qualitative factors to reach a conclusion.

Figure 2. Selection based on values

Chart showing the categories used by EdenTree to filter investments

Example: Severn Trent

Severn Trent is a water company providing water management and wastewater treatment services to residential and industrial customers in the UK. Our Global Impact Bond Fund has invested in the £400m Severn Trent 2.625% 2033 Sustainability Bond since its issuance in early 2022.

Funds raised through this bond will be deployed towards projects with a positive environmental and social impact, such as improving water quality, increasing biodiversity, producing renewable energy and ensuring affordable water services.

We describe below how we assessed the company using our impact framework.

Graph showing the intentionality of Severn Trent

Intentionality – Severn Trent sets out clear targets for positive impact in its annual sustainability report and in the sustainable debt framework it uses to determine the allocation of its bond proceeds.

As the company responsible for treating wastewater and delivering clean drinking water to 4.6 million homes a day, Severn Trent identifies SDG 6 (clean water and sanitation), SDG 7 (clean energy and affordable) and SDG 13 (climate action) as the main results of its activity. can drive.

Along with its adoption of ICMA’s Green and Social Bond principles and associated product categories for its sustainable debt issuance program, we believe this demonstrates above-average intentionality.

Chart showing that Severn Trent's contribution to SDG results is above average

Contribution – The company has made multiple material, ecological and social commitments, in particular by working with farmers to reduce agricultural waste and pollution; reduce leaks by 15% over the next three years; promote accessibility by increasing the number of customers benefiting from social tariffs; and provide 1,000 jobs in social mobility cold spots.

It also has an exemplary record for minimizing pollution incidents, earning 18 out of a possible 20 stars from the Environmental Protection Agency, among the best in the industry, compared to an average of 13 for its utility counterparts. water.

The measurement – The instrument’s positive impact KPI objectives are clearly defined, measurable and ambitious, with corporate objectives reviewed annually to determine progress:

Graph showing Severn Trent scored above average on the measure

  • 100% annual renewable energy produced by 2030

  • zero net operational carbon emissions achieved by 2030

  • 15% reduction in leakage level to 363.5 megalitres/day achieved by 2025 and 50% reduction achieved by 2030

  • 1090 hectares of land conserved and enhanced by 2025

  • 2100 km of improved river ecology by 2025

  • 195,000 customers supported through payment assistance programs by 2025 and the eradication of water poverty by 2030

Graph showing Severn Trent scored above average on accountability

Responsibility – As an entity, Severn Trent does not generate revenue in any of the areas of business captured under our ethics/values ​​screens. We also rated it favorably in our responsibility analysis, notably on environment and climate change and corporate governance.

Severn Trent is also aligned with our thematic pillars of durable solutions and education, as shown in the figure below:

Figure 3. Severn Trent Rating of Negative and Positive Outcomes

Chart showing how EdenTree rates Severn Trent on SDG results

Commitment

While this case study has focused on the three key pillars of impact investing – intentionality, contribution and measurement – ​​engagement is also a core part of our investment approach.

Between January and February 2022, we worked with eight water and wastewater utilities in the UK, including Severn Trent, as well as various regional and national river trusts.

Our objective was to halt the deterioration in performance and better understand the industry’s challenges in improving areas of weakness, including:

  • The nature of pollution incidents and environmental fines and penalties

  • River quality – perception, challenges, investment and improvement

  • Beach quality (if any) and investment in waste water outlets, etc.

  • Biodiversity with a focus on impact and adding to biodiversity

  • The use of “nature-based solutions” and technology to improve performance

  • The regulatory regime and whether it enables investment in river quality

  • The role of investors, including public policies (government, regulators and the Environment Agency)

The State of Our Rivers: A Thematic Engagement (2022) provides more detail on our engagement with Severn Trent and other UK water companies.

EdenTree Investment Management Limited (EdenTree) is authorized and regulated by the Financial Conduct Authority and is a member of the Investment Association. Company reference number 527473.

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