Organisation: Kandeo Asset Management
Signatory type: Investment manager
HQ country: United States
COVERED IN THIS CASE STUDY
Asset class: Private equity and debt
Geography: Latin America
Sector: Financial services
Kandeo is an asset management firm focused on private equity and private debt investment in Latin America. We have developed an approach to considering ESG issues throughout the investment process that involves us working closely with portfolio companies to improve their sustainability performance.
Why this approach?
Kandeo strongly believes that obtaining outstanding financial results is correlated with generating positive impact, and is imperative in the development of responsible investments in the region in which Kandeo operates. Kandeo is committed to promote integrated-thinking principles that create more value and enhance decision making.
Kandeo has proven that an effective application of environmental, social and governance (ESG) criteria and a hands-on approach can improve expected risk-adjusted returns, while making a social and environmental impact. To achieve this, Kandeo has developed a strategy that produces tangible results year after year: from private equity funds, Kandeo invests in companies that offer financial services to people and companies that are not efficiently served by traditional banking, contributing positively to financial inclusion. In fact, up to 30% of the clients of Kandeo’s portfolio companies are accessing financial products for the first time in their lives. Similarly, in private debt, Kandeo provides financing resources to companies from economic sectors that are not served by traditional banks. This is through a credit product tailored to their needs, promoting their growth, and improving their governance, productivity, and job offerings.
The approach in practice
Kandeo, with the support of companies’ management, implements a system to manage ESG risks for each company in the portfolio.
Based on PRI guidance, in combination with IFC and IDB Invest’s performance standards, Kandeo applies the following methodology to incorporate ESG factors in its investments:
Identify. Kandeo performs a first filter through its “Kandeo go-no-go” tool, ensuring that the potential investee company and its clients do not undertake activities on the IFC exclusion list, while verifying that the company has no registered incidents or fines associated with environmental or social issues.
Evaluate. Subsequently, through an exhaustive due diligence process, based on IFC/IDB performance standards, the company’s risk level is categorised.
Model. An action plan is established together with the management of each company and the KPIs to be monitored are defined.
Monitoring. Kandeo works with the companies to develop an effective action plan that contains the following six basic indicators:
- Environmental and social management system (ESMS) – the programme needs to be documented.
- ESG committee – regular committee meetings and actions.
- Annual work plan – documented plan with ESG KPIs.
- ESG team – staff responsible at each company to meet each programme step.
- Annual reports – yearly reports provided to external parties.
- Training – necessary and essential training provided.
Since the Kandeo 1 and 2 funds are in the divestment stage, step 4 of the methodology described above was applied to the eleven companies that are part of the portfolio. In the case of the new Kandeo 3 fund, the complete methodology was applied.
One of the eleven companies is Acceso Crediticio, a Peruvian company in which Kandeo invested at the end of 2015. Acceso Crediticio is focused on granting loans for the purchase of natural gas vehicles for cab drivers, who are not well served by traditional banking in Peru. The company was only funded by local banks and friends and families.
After Kandeo’s arrival, the company’s positive social and environmental impact was highlighted, and 19 international funders approved credit lines to the company equivalent to USD 200 million. In 2021, Kandeo applied step 4 of the methodology, obtaining the following results: The company had many ESG aspects embedded in its DNA. But while it had a social and environmental risk management system and a full-time team focused on sustainability issues, it did not have an ESG committee or work plan, and did not make results visible to stakeholders.
Therefore, Kandeo made a presentation to Acceso Crediticio’s senior management (standardised and presented to all portfolio companies) with the findings, the analysis, and a proposal for an updated action plan. Senior management showed its interest in carrying out all the actions proposed by Kandeo, and reaffirmed its commitment to effectively managing ESG issues.
Similarly, the company added a Sustainability Manager to weekly Board committee meetings, so that she could be more involved in the core business, and asked for an independent director specialising in ESG issues to participate in the ESG Committee.
Several other initiatives were carried out jointly to strengthen the company:
- Creation of vehicle credit for women cab drivers/entrepreneurs.
- Electric vehicle financing pilot.
- Evaluation of ESG rating by a big four auditor.
- Just transition bond issuance process.
Kandeo strongly believes that any new initiative must have buy-in from senior management. In view of this, Kandeo prioritised meeting with senior management to demonstrate the importance of ESG issues.
With the support of the executive management, it was more straightforward to educate and encourage the rest of the workforce to implement ESG practices. Using a cross-cutting methodology with quantitative results, the ESG team was able to:
- Develop a customised action plan for each company.
- Strengthen the relationship with the portfolio companies.
- Increase the commitment of senior management on ESG issues.
- Incorporate ESG issues as a core part of the business, rather than a stand-alone area, by assigning a responsible member and in some instances even creating a full team to implement ESG practices.
- Issue presentations/teasers evidencing the ESG impact of companies.
- Disclose ESG information to stakeholders.
- Include at least one woman on the board of directors of each of the portfolio companies by 2021. The percentage of the female workforce increased overall, and the participation of women in senior positions rose. For example, the portfolio company Tropi went from having no women in senior positions in 2017 to 35% female participation in management positions in 2021.
- Improve policy frameworks and customer service channels, and create committees including audit committees and compensation committees.
The analysis has allowed us to generate synergies among portfolio companies. For example, it was identified that some had ESG committee meetings and others did not. Here, the companies that intended to form committees received advice from the experiences of similar companies.
Our ESG methodology has allowed Kandeo to better monitor the status of its ESG investments and improve its competitive advantage over other private equity/debt funds in having a high ESG impact.