Case study by Industy Funds Management

Industry Funds Management (IFM) is one of the largest global infrastructure fund managers with direct investments in airports, toll roads, utilities, public private partnerships, sea ports and renewable energy companies around the world. We have an infrastructure portfolio comprising 26 assets held in two funds. A specialist team of 35 dedicated staff focuses on all aspects of acquisitions and asset management and is assisted by in-house legal counsel and tax specialists. Owned by some of the largest not-for-profit pension funds in Australia, IFM is differentiated via its ownership structure and philosophical alignment that is focused on investors. Almost 90% of IFM’s owner-investors (by funds under management) are signatories of the PRI.

Key findings

  • ESG research and analysis should be integral to the investment process and undertaken by mainstream investment professionals.
  • ESG specialists, if used, should be financially numerate, familiar with the infrastructure sector, and have a strong commercial, technical and legal focus. They should be integrated and working together with investment professionals.

Reasons for developing an ESG policy

Infrastructure assets have long life spans hence the investment appraisal and asset management processes must consider all risk factors to ensure that the value of investments is maintained over their life. As a long-term investor, we consider all material environmental, social, governance and reputational factors (alongside financial, tax and economic factors) in our risk assessment.

IFM has a board approved ESG policy that applies to infrastructure and all other asset classes it manages. The policy objective is to protect and enhance the value of our investments for the long-term.

“Our ESG checklist has over one hundred comprehensive questions covering greenhouse gas emissions, water supply, waste, environmental pollution, labour and community relations, governance and workplace safety.”

Azhar Abidi (Director, Responsible Investment) Industry Funds Management

Decision-making approach

IFM’s investment process commences with an initial review by the investment group, then comprehensive due diligence to final approval by the IFM Investments Committee. For very large transactions, the investment decision is referred to a Board Investment Committee for final approval. Where executives are concerned that a potential investment may not be in accord with IFM’s ESG policy, we require preliminary approval by the Investments Committee prior to commencing due diligence. All investment decisions are formally peer reviewed to provide an additional level of scrutiny prior to submission to the Investments Committee.

The weighting given to different ESG factors depends on their materiality on asset risk and returns. Depending on whether they are qualitative or quantitative, ESG factors are integrated into the revenue and cost profile or in the valuation through the discount rate.

Due diligence process

During the due diligence process for new investments, the investment group uses a detailed guide to assess ESG risks against IFM’s policy criteria. Developed on the basis of our experience of investing in this sector, and with reference to international benchmarks such as the IFC Sustainability Guidelines, the purpose of this guide is to highlight ESG issues that may not be readily identifiable during the course of routine due diligence. The checklist has over one hundred comprehensive questions on topics such as greenhouse gas emissions, water supply, waste, environmental pollution, labour and community relations, governance and workplace safety. Findings from this review are factored into the investment decision and noted in the investment paper submitted to the Investments Committee.

RISK APPRAISAL    Preliminary review of investment opportunity 
Consideration against investment criteria and IFM Group Corporate Environmental, Social and Governance Policy 
Appointment of external consultants
DUE DILIGENCE     Full due diligence and assessment of all material risks including ESG factors 
IFM’s specialist consultants engaged
Formal peer review for additional scrutiny 
Preparation of IFM base case and investment paper
INVESTMENT DECISION     Investments Committee approval 
Board Investment Committee approval 
Negotiation of sale and purchase agreement and shareholders agreement, if required 
Settlement/financial close 

We routinely engage environmental, legal, commercial and other technical consultants to assist in due diligence. We also have access to a range of specialist advisors who bring insight and knowledge in their sectors and are invaluable in ensuring that IFM’s investments are ‘world class’ when it comes to safe, profitable and sustainable operations.

Closely aligned to the UN Global Compact, our ESG policy seeks to ensure that new and existing investments are not culpable of environmental damage, gross corruption, systemic violation of human rights or any other serious violations of fundamental ethical norms. Our approach is based on the belief that well-governed companies with responsible ESG policies make for better long-term investments. 

ENVIRONMENT SOCIAL RISK GOVERNANCE 
Environmental risks are reviewed in terms of potential costs (carbon taxes, costs related to reducing pollution), legal and compliance issues and reputational impacts. The risk management protocols of companies are reviewed, including their historical performance. Environmental considerations are also relevant to asset valuations. For example, climate change may not be apparent in the near future but it may impact an asset’s operational and financial performance in the long-term. In a recent sea port acquisition, we used a technical consultant to ascertain that a rise in sea levels and flooding would not impact port operations for the foreseeable future. In order to avoid the risk of industrial action and litigation, we review social issues such as labour relations, enterprise agreements and workplace safety to identify and mitigate areas of concern. Human rights violations are unusual for infrastructure assets in OECD countries but nonetheless, we require compliance with international human rights accords which is over and above the usual requirement to meet local and national laws. We acquire equity stakes in companies with significant influence and control to ensure that our interests as shareholder are represented at the board level. Governance risks are reviewed in terms of shareholder rights and protections through legal documents as well as board representation. We strive to ensure that shareholder agreements are negotiated with favourable indemnities and warranties as well as voting rights.