Cordiant Digital Infrastructure | ESG

Cordiant Capital Inc. has long combined traditional investment approaches with environmental, social and governance (ESG) analysis and an implementation of Impact Investing to ensure profitable investment goes hand-in-hand with a sustainable, responsible approach.

ESG risk mitigation and analysis, which covers a wide range of issues, including opportunities to create value, has not always been embedded in traditional financial analysis models, yet it has frequently been of significant financial relevance. With the integration of ESG and Impact principles in the investment process, and the add-on expertise of the ESG and Impact team, Cordiant has been a pioneer in recognising the importance of merging traditional investment analysis with new sustainable and responsible methods of analysis and investment to produce profitable investment strategies.

As investors focused on positive impact, Cordiant understands the responsibility of our investments serving the dual purposes of wealth creation and stewardship. Accordingly, Cordiant’s management engages on issues it deems important, whether those be environmental, social, or economic. This collaboration aims to minimise adverse impact on the environment and the local population and workers.

Cordiant is committed to understanding the challenges and identifying the solutions that may foster the quality of the investment, while enhancing the value of the company. Cordiant uses a collaborative, active, and ever-evolving approach that can provide investee companies with the guidance to improve ESG standards and practices and achieve optimal development outcomes.

Cordiant applies this same approach to its managed Cordiant Digital Infrastructure Limited (‘CDIL’) investment trust, where it is a core feature of our investment strategy. ESG risk mitigation and analysis, alongside targeted, measurable, and quantifiable impact, is key in our effort to create responsible and profitable returns.

Cordiant Capital is a private institutional asset manager investing in global infrastructure and real asset strategies (both private equity and private debt) with a middle-market growth capital orientation. Cordiant manages funds with committed capital of USD 2.9 billion. Throughout its history, Cordiant Capital has combined traditional investment approaches with environmental, social and governance (ESG) analysis and an implementation of Impact Investing principals. Combining sustainability and responsibility with attractive risk-adjusted returns for given assets classes has been a central pillar in Cordiant’s investment approach. We view our approach to ESG risk management and Impact management as two parallel concepts:

ESG - An Environmental, Social and Governance (ESG) framework includes the processes and systems in which one monitors, manages, and reports risks and seeks opportunities related to the three key areas. The ‘E’ assesses how a company performs as a steward of nature; the ’S’ examines how the company manages relationships with employees, suppliers, customers, and the communities where it operates; the ‘G’ examines the company’s leadership. This is used as a tool to minimise societal or environmental costs, to mitigate risks that would impact the performance of an investment, and to find solutions to improve the company with the objective of deriving responsible and sustainable financial returns over the medium-to-long term.

Impact - An Impact Investing framework considers the approach an investment manager takes to intentionally generate positive, measurable social and/or environmental impact alongside a targeted financial return. At Cordiant, we seek to generate significant positive impact contributing towards selected Sustainable Development Goals (SDGs), and we also consider and review the scope of potential negative outcomes to try to mitigate or eliminate these. The key objective is to combine commercial goals of an investee with specific beneficial impact on some aspect(s) of society or the environment, and screens to avoid specific types of negative impact.

Cordiant has long been committed to sustainable and responsible investing. In 2008, the firm became a signatory of the UN Principles for Responsible Investment[1], and subsequently became a member of the Global Impact Investing Network (GIIN)[2]. In April 2019, Cordiant was a founding signatory - and speaker at the launch - of the Operating Principles for Impact Management (the ‘Impact Principles’): an audited framework for assessing that a firm delivers impact in a sustainable way. As a signatory of the Impact Principles, Cordiant is committed to implementing a global standard for managing investments for impact. Furthermore, Cordiant has been working to develop and implement best practices as part of our approach to investment management.

In addition to internal monitoring and evaluation, Cordiant elected to audit its Cordiant VII fund in accordance with the Impact Principles for impact monitoring, evaluation methodology, and reporting; and going forward will also audit CDIL. The first external audit, completed in Q1 2021, confirmed the alignment of Cordiant’s impact management systems with the Impact Principles.

Cordiant Digital Infrastructure Limited (‘CDIL’)

Cordiant applies its ESG and Impact investment policies equally to its 2021 managed and LSE listed investment Trust – Cordiant Digital Infrastructure Limited (‘CDIL’) where ESG and Impact are key components of the investment strategy. As an equity fund managed by Cordiant Capital, CDIL applies the same ESG and Impact standards, policies, and principles, appropriately tailored to the digital infrastructure sector.

In assessing CDIL investments, Cordiant proactively engages with relevant actors to garner insight into existing and potential business, environmental and political risks that might arise as part of its operations. By adequately addressing these factors with front-end risk assessment, Cordiant inculcates risk scenario analysis, and incorporates into valuation and pricing as appropriate.

Recognising that a variety of ESG and Impact frameworks and standards exist in this rapidly evolving field, our ESG and Impact policies are based on a number of internationally recognised approaches. We combine these guidelines together with our own evaluation methodology and risk analysis process as appropriate for the digital infrastructure sector. Since different sectors of the economy have differing material ESG issues and Impact opportunities, our approach requires nuance and flexibility rather than a heavy-handed ‘one size fits all’ approach.

As an inherently impactful sector, digital infrastructure offers Cordiant an opportunity to select companies where our investment and active engagement can intentionally generate measurable social and/or environmental outcomes. In this sector, investments can support positive impacts through the responsible application of capital, whilst also offering additional scope to generate operating improvements with societal benefits. While the digital infrastructure sector can be mapped against a number of the UN Sustainable Development Goals (SDGs), CDIL has chosen certain goals on which to focus:

SDG 8: Decent Work and Economic Growth

SDG 9: Industry, Innovation and Infrastructure

SDG 10: Reduced Inequalities

SDG 11: Sustainable Cities and Communities

SDG 13: Climate Action

SDG 15: Life on Land

Via Governance and management reporting of its investee operators of digital infrastructure assets, CDIL will seek to minimise its negative impact and maximise its positive impact as follows:

1. Monitor labour rights and promote safe and secure working environments for all workers;
2. Promote gender equity in the workplace, where appropriate;
3. Build resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation;
4. Improve sustainability with infrastructure upgrades where appropriate, with the adoption of clean and environmentally sound technologies and processes;
5. Significantly increase access to information and communications technologies, and strive to widen affordable digital broadband access wherever possible;
6. Support positive economic, social, and environmental links between urban, pre-urban and rural areas by strengthening national and regional connectivity where possible;
7. Protect, restore, and promote sustainable use of terrestrial ecosystems in and around our digital infrastructure where possible;
8. Periodically review management objectives, in the context of the impact we would like to achieve through its capital investment programmes.

While widely discussed within the investment management industry, ESG risk mitigation and analysis has not historically been embedded in financial analysis models. Cordiant, however, was a pioneer in recognising its relevance as a potential contributor to investment IRRs. Under the expertise of our dedicated ESG and Impact team, Cordiant has merged traditional investment analysis with new sustainable and responsible methods of analysis and investment to drive profitable investment strategies. We apply this same approach to Cordiant Digital Infrastructure Limited (‘CDIL’) where it is a core principle of our investment strategy. ESG risk mitigation and analysis, alongside delivering measurable and quantifiable impact, are key to our objectives of creating responsible and attractive risk-adjusted returns.

CDIL’s Guiding Principles

CDIL approaches ESG and Impact by integrating ESG policies and principles into the investment process to better align investment capital with societal objectives, such as enhancing access to the digital economy, reducing greenhouse gas emissions, supporting the move to a carbon neutral economy, and embedding sustainable practices into all aspects of the business. Our objectives are specifically tailored to the digital sector, and thus consider:

1. The need to reduce the carbon footprint of the digital economy through better-designed, more efficient data centres as well as the integration of clean, renewable electricity sources into the energy mix;
2. The need to reduce the carbon footprint of society, through enhanced communications that diminish the need for unnecessary travel and shrink pollution-causing congestion;
3. The need to better connect under-served businesses and households to the digital economy, thereby supporting enhanced opportunity and economic activity.

[1] The United Nations supported Principles for Responsible Investment is an international network of investors working together to implement six Principles outlined into investment practice. The six Principles of UNPRI are: 1. Incorporating ESG issues into investment analysis and decision-making process; 2. Incorporating ESG issues into ownership policies and practices; 3. Seeking appropriate disclosure on ESG issues by the entities that are invested into; 4. Promoting acceptance and implementation of the Principles within the investment industry; 5. Signatories working together to enhance the effectiveness of the implementation of the Principles; 6. Signatories reporting their activities and progress towards the implementation of the Principles.

[ 2] The Global Impact Investing Network is the global champion of impact investing, dedicated to increasing its scale and effectiveness around the world.

CDIL applies Cordiant’s ESG and Impact process and policies with three key principals: 1) Screening - process and check list due diligence for new investments; 2) Management - monitoring ESG policy for compliance, risks, and opportunities, as well as monitoring impact for targeting positive outcomes and minimising or eliminating negative impact where possible; and 3) Tracking - data capture and annual reporting.

With no exception, Cordiant does not make investments in companies that violate any of the following standards:

Exclusion List (2021)

1. Forced labour and child labour;        
2. Any company that directly promotes racist and anti-democratic media;
3. Any product or activity considered illegal under international conventions and agreements, host country laws, regulations, or is subject to international phase-outs or bans such as: ozone depleting substances, PCB’s (Polychlorinated Biphenyls) and other hazardous pharmaceuticals, pesticides/herbicides, or chemicals; wildlife or products regulated under the Convention on International Trade in Endangered Species or Wild Fauna and Flora (CITES); or unsustainable fishing methods;   
4. Destruction of high conservation value areas, restructure meaning the (1) elimination or severe diminution of the integrity of an area caused by a major, long-term change in land or water use or (2) modification of a habitat in such a way that the area’s ability to maintain its role is lost. High Conservation Value (HCV) areas are defined as natural habitats where these values are of outstanding significant or critical importance;
5. Any of the following products form a substantial part of an investee company’s primary operation: tobacco, land mines or anti-personnel weapons;  
6. Cross-Border trade in waste and waste products, unless compliant with the appropriate convention and the underlying regulations;
7. Companies that mine coal, and/or companies that generate more than 30% of their revenue from coal. Cordiant’s preference is to avoid coal in its entirety;
8. Radioactive material and unbound asbestos fibres; This does not apply to the purchase of medical equipment, quality control (measurement) equipment or any other equipment where the radioactive source is understood to be trivial and/or adequately shielded.

Screening

Prospective Cordiant investments are subject to the following evaluation screen:

Cordiant Investment Criteria Matrix (2021)

Environmental

• Investments align with Paris Climate Accord objectives
• Compliance with relevant environmental laws and ‘Best Practice’
• Support precautionary approaches to environmental challenges
• Undertake initiatives to promote greater environmental responsibility
• Encourage the development and dissemination of environmentally friendly technologies
• Biodiversity conservation and Sustainable Management of Living Natural Resources

Social

• Identifies (during Due Diligence) endeavours that pose a threat to cultural heritage
• Ensuring that investee companies undertake to anticipate, avoid, or minimise the adverse impact of their operations on communities
• Avoiding displacement and minimising adverse social and economic impacts from land acquisition or restrictions on land use
• Adherence to the UN Global Compact Principles relating to Human Rights, Labour and Environment:

         -  Support and respect the protection of internationally proclaimed              human rights;

         -  Safeguard against human rights abuses;

         -  Uphold freedom of association;

         -  Support the elimination of all forms of forced and compulsory                  labour;

         -  Support the effective abolition of harmful child labour;

         -  Support the elimination of discrimination in respect to employment          and occupation

Governance

• Investee companies properly address business ethics
• Endeavour to invest in companies that exhibit honesty, integrity, and fairness in their business dealings
• Working to promote, through its investments, international ‘Best Practices’ in relation to corporate governance
• Analyse potential investments for risks associated with politically exposed persons (so-called PEPs) and governmental corruption.  

Management

Cordiant employs internationally recognised standards and risk management practices in an effort to best understand the ESG and Impact progress of all investee companies. We believe the most appropriate way forward is to ground ESG and Impact policies in ‘Best Practice’. Cordiant is a licensee of the Value Reporting Foundation’s Sustainability Accounting Standards Board (‘SASB’) Standards.[3] The SASB Standards were established through a rigorous and inclusive process, combining SASB’s own evidence-based research with comprehensive participation and feedback from key stakeholder groups. The transition to report in line with the SASB standards has been undertaken for two primary reasons. Firstly, to sharpen the focus on relevant industry specific metrics, through the SASB defined industry standards. Secondly, incorporation of the SASB Standards will enhance the measurement, monitoring and disclosure of financially material sustainability information. With the adoption of the relevant SASB standards, Cordiant aims to deepen our own, as well as our investors’ understanding and awareness of key sustainability issues. This understanding will be underscored through the adoption and integration of sustainability metrics that are relevant to the financial performance of the digital infrastructure sector. Additionally, this will enable more refined and targeted ESGAP’s to be implemented across this sector.

Cordiant’s ESG Risk Management Process

Phase 1:         Identification of Applicable Environmental and Social Laws & Standards

Phase 2:         ESG and Impact Risk Assessment and Categorisation

Phase 3:         Environmental, Social and Governance Assessments (including the use of SASB Metrics)

Phase 4:         Stewardship and Engagement with Investee Company

Phase 5:         Development of ESG Action Plan ‘ESGAP’

Phase 6:         Monitoring and Reporting (using SASB Metrics)

Phase 7:         Annual Review

Tracking

As a founding signatory of the Impact Principles, Cordiant is committed to managing for impact beginning with pre-investment due diligence through the life of each investment and exit. Cordiant has identified specific SDGs and underlying targets towards which investments in the fund and active engagement with investee companies can help generate positive, measurable social and/or environmental impact. To make its approach to impact management more systematic, CDIL is initiating the use of the Impact Management Project’s (IMP)[4] ‘five dimensions of impact’ and will continue to reference other best practices in the industry.

[3] https://sasb.org/

[4] https://impactmanagementproject.com/

Cordiant’s primary obligation is to generate attractive, risk-adjusted investment returns within prescribed strategies. As a responsible member of the investment community, Cordiant seeks to inform those objectives with a principled and results-oriented vision of ESG and Impact.

A structured business approach to ESG and Impact assists Cordiant in managing environmental, social, and ethical risks. Cordiant believes that this approach – embodying (1) a respect for ESG principles and (2) inclusion of Impact goals – optimises investment strategies. Its application can enhance risk management, allow for subtle responsiveness in volatile markets, strengthen stakeholder relations and generally maintain or improve an investee entity’s reputation and profitability.

Each potential investment is subjected to a multi-stage process focused on ESG and Impact – the goal of which is to outline ESG risks, engage with the investee company in order to mitigate any potential risks, create opportunity, monitor improvement, and establish Impact objectives.

Investment Process

Stage One – Due Diligence: Our investment professionals and ESG and Impact team establish a baseline understanding of all key risks and issues. The objective is to assess each company through the lens of our ESG policies and principles, as well as identify any material ESG considerations. Our Exclusion List and Criteria Matrix are used to determine whether a Company aligns with Cordiant’s key goals. If so, our team conducts an ESG and Impact Assessment and Categorisation. Using SASB metrics, the teams conduct an in-depth environmental, social and governance assessment alongside an in-depth analysis of the market and any potential ESG opportunities. Additionally, our aim is to deliver measurable, positive impact. As such, we seek to identify companies that will help us achieve one or more environmental and social impact objective that are aligned with specific UN SDGs and underlying targets.

Stage 2 – Gap Analysis: Cordiant thereafter conducts a ‘Gap Analysis’ for evaluating a firm’s performance. The SASB metrics are crucial as key indicators used to identify the areas in which an investee excels, as well as the areas an investee needs to improve (or ‘Gaps’ in an investee’s ESG policies/procedures). The SASB metrics are also analysed in an effort to determine and assess positive and/or negative Impact, as well as understand what SDGs and underlying targets can be achieved. During this ‘Gap Analysis’, Cordiant determines the requirements and mitigants necessary for closing the identified gaps, as well as relevant remediation policies.

Stage 3 – Engagement: After analysing an investee company’s financial, ESG and Impact goals, Cordiant works with the company to implement remediation measures to improve, alongside measures to mitigate (and if not possible, reduce) any adverse ESG or Impact outcomes. The Cordiant team and the Company then define the ways in which ESG concerns and remediations will be handled throughout the life of the investment. It is essential a Company meets our ESG requirements and expectations. As such, if concerns seem highly material, Cordiant will engage proactively with the Company to develop an ESGAP – an Action Plan outlining the necessary measures a Company must adhere to in order to meet our ESG requirements and expectations. If required, consultants will be hired to evaluate and monitor environmental and social risks so that Cordiant can effectively recommend an appropriate action plan. Where necessary, the consultants will provide Cordiant with input on the risks and the steps necessary to mitigate these risks during the investment phase.

Stage 4 – Post-Investment Monitoring and Evaluation:  Monitoring and Evaluation is vital in this process to ensure that actions are consistent with the agreed-upon ESG plan, and to track improvement. In equity deals, this is conducted at the level of the Board of Directors. In credit deals, monitoring is conducted either on a bi-annual or yearly basis – depending on the materiality of risks, and throughout the life of the loan. Cordiant conducts a yearly monitoring of the firms’ performance through (i) detailed reports by the investee company; (ii) as appropriate, an Annual Monitoring Report (AMR) which quantifies risk and E&S indicators; (iii) reports, if relevant, on implementation of the ESG action plan.

Additional Technical Support and Service Provisions

Post-Investment Support: Cordiant understands the responsibility, as investors focused on positive impact, of our investments serving the dual purposes of wealth creation and stewardship. Accordingly, Cordiant’s management engages on issues it deems important, whether those be environmental, social, or economic. This collaboration serves to minimise adverse impact on the environment or to the local population and workers. Where possible, we collaborate with businesses to set up mitigation measures through readily accessible ‘remedies toolkits’.

Technical Assistance and Capacity Building Support: Cordiant is committed to understanding the challenges and identifying the solutions that may foster the quality of the investment while enhancing the value of the company. Cordiant uses a collaborative, active and dynamic approach that can provide investee companies with the incentives to improve ESG standards and practices and achieve optimal development outcomes. As appropriate, Cordiant will be willing to assist investee companies with (1) Access to Technical Service Providers to assist in remedying deficiencies; (2) Specialised Technical Experts to assist in fully assessing risks; (3) Tools and resources for enhanced monitoring.

Each area within Cordiant’s focus sectors presents their own individual and unique set of Occupational Health and Safety (OHS) risks. These require the Cordiant team to integrate health and safety prevention principles as part of the Due Diligence, ESG Action Plans and monitoring activities and evaluation reports.

As a means to ensure that procedures for identifying hazards and assessing OHS risks in an accurate and timely manner are in place, Cordiant does assess each investee company’s capacity, commitment and track records regarding OHS and Environmental Health and Safety (EHS), as part of the preliminary and final due diligence.

Cordiant assesses each investee company’s policies, management plans and practices. The broad aim is to evaluate whether they are designed and implemented in order to ‘eliminate and, where this is not possible, reduce, the level of [workplace] risk to an acceptable level with reference to Good International Industry Practices (GIIP).[5] SASB OHS-related metrics are, if relevant, incorporated at the outset during Due Diligence, and also used in the monitoring and reporting of OHS risks. Cordiant also refers to the World Bank Group General EHS Guidelines and the IFC Performance Standards.[6]

Cordiant looks to SASB and World Bank Guidance in assessing Safety Management Systems ‘SMS’. As such, Cordiant typically encourages the implementation of: 1. Management commitment and employee involvement; 2. Worksite analysis and hazard identification; 3. Hazard prevention and control; 4. Employee safety training within an SMS. Key measures Cordiant keeps in mind are; 1. Eliminating or reducing hazards, which includes the replacement of dangerous materials with less dangerous materials; 2. Isolating or controlling hazards at their source; 3. Minimising risks through the design and use of safe systems of work; 4. Providing appropriate protective measures - which can include prioritising measures aimed at reducing the risk for more than one person (collective protection) over those designed to protect a specific worker (personal protective measures).

Where appropriate and called for, Cordiant develops supplementary Action Plans to ensure that any gaps are addressed. As part of the Action Plans, we ensure that the applicable OHS & EHS measures have been addressed and will be complied with. As part of the process, we therefore require investee companies to implement the measures internally within all affected operations. Where OHS risks are deemed to be high, Cordiant does consider bringing in consultants to advise us on the standard of companies’ OHS management prior to investment. As such, Cordiant requests that investee companies comply with the agreed upon management measures (or ensure that such policies become enacted as a consequence of a vote of the Board). As appropriate and where possible, Cordiant seeks to ensure that this also applies in the supply chain.

Cordiant does seek to ensure that investee companies have adequate emergency planning and response provisions and procedures for the safety of workers, contractors, and, when appropriate, affected communities (though this is a rare instance in Cordiant’s focus sectors). Serious work-related incidents should be reported to the Board and to Cordiant on a timely basis.

[5] CDC Group Toolkit

[6] World Bank Group Environment, Health and Safety Guidelines are technical reference documents with general industry-specific examples of Good International Industry Practice, referred to in the World Bank’s Environmental and Social Framework and in IFC’s Performance Standards.