Case study by APG

Adveq talks about the importance of a solid ESG framework that enables oversight of management of ESG issues and triggers corrective actions where necessary. The necessary oversight of both investment managers and of the real asset are discussed.

“Active ESG monitoring is integral part of the risk management framework and drives long-term returns.”

Gaia Arnaboldi, Co-Head Real Assets, Adveq Management AG

Key takeaways

  • Farmland investments are by definition exposed to ESG risks. Consequently it is essential to integrate the evaluation and reporting of ESG issues into on-going monitoring. This is even more critical when the underlying investments are in emerging countries.
  • Effective monitoring will focus both on the underlying investments and the fund manager, with a distinct emphasis from the investment phase, through the value-creation phase to the divestment phase.
  • A functioning monitoring process enables investors to keep control over their farmland portfolio and take appropriate action where needed. Early risk identification and active involvement are crucial in order to secure maximum value for investments.

Adveq Real Assets offers specialised investment solutions which allow its clients to access select real asset segments globally, including farmland.

Given the size and potential impact of farmland projects on the environment and local stakeholders, the long-term attractiveness of a portfolio of farmland investments relies on good management of ESG risks that enables oversight and triggers corrective actions when necessary.

The importance of monitoring

Monitoring and reporting on how ESG issues are managed should be an integral part of a solid risk management process. It should also enable the identification of potential ESG issues in a way that triggers action when necessary. The goal of the overall process is to maximize the investment value by minimising risks and developing a close relationship with the fund manager, Adveq has developed a simple “traffic light” system to help them do this. Green denotes a situation where there is no reason for concern, amber, those situations where a close engagement is essential and red where action is required.

The ESG monitoring of private equity fund commitments must be implemented both at the manager level and at the underlying farm level.

Monitoring emphasis will change over time

The emphasis of actions which are monitored changes from the initial investment phase, through the value-creation phase and finally to the divestment phase. These must then be integrated within the risk management process to effectively assess potential rebalancing or risk-mitigating actions within the overall investment program, such as through secondary sales. Clear responsibilities must be assigned upfront and carried out by the investment professionals on a continuous basis. Figure 1 shows a recurring loop of due diligence and monitoring, assuming a fund manager raises a subsequent fund every three years.

Monitoring fund managers

In the investment phase the main focus is on due diligence of new projects and whether they are aligned with the stated ESG policy. More importantly, during the value-creation phase, the focus shifts towards the progress in implementing and monitoring the ESG plan in each underlying investment, and the resources made available to support the farms. At this stage, the aim is to ensure that the managers bring their own expertise to bear on the portfolio and adequately disclose progress and issues to the investors. Finally, in the divestment phase, ESG monitoring focuses on peer-group comparison and the ability to improve the success of the sale process through a solid ESG performance.

Adveq’s recurring due diligence and monitoring

Adveq’s recurring due diligence and monitoring

Monitoring individual assets

Given the particular characteristics of investments in agriculture, it is vital to carry out ESG monitoring on the individual assets as well as fund managers. Quantitative monitoring focuses on measurable ESG key performance indicators (KPIs), while qualitative monitoring concentrates on progress towards meeting KPIs and outlook. Many ESG issues are especially challenging for farmland investments in emerging markets, which makes the careful monitoring and management of these issues particularly important in those countries.

Issues to monitor

During the investment phase

Examples of issues to monitor at the farm level during the investment phase include, but are not limited to:

  • Environmental issues: What environmental risks have been identified? What is the specific action plan to mitigate them?
  • Social issues: Has a Social Impact Assessment been carried out? How will the identified risks be mitigated?
  • Governance issues: Were local communities consulted in a free, transparent and culturally appropriate way before land was acquired? Are anti-bribery and anti-corruption processes in place? How will they be monitored?

During the value-creation phase

The monitoring focuses on the ESG progress and disclosure, for example:

  • Environmental issues: What is the progress in mitigating environmental impact? Is the use of natural resources such as water being improved?
  • Social issues: What are the labour, health and safety conditions? What is the progress in mitigating identified social risks?
  • Governance issues: Have there been any breaches of local law or international standards (even in countries where law is poorly enforced)? Is the fund manager transparently reporting progress and issues as they arise?

During the divestment phase

The monitoring focuses on appropriate ESG long-term set-up within each farm, which significantly increases the value of the farm during the sale process.

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