For over two decades, ADM Capital has witnessed Asia’s profound economic transformation and the progress out of poverty for many millions. The dramatic shift to production in Asia has strained our ecosystems, depleted our natural resources and pushed planetary boundaries beyond levels deemed safe.
Additionally, changes to our increasingly erratic and warming climate have been recorded and these are, in part, driven by human actions, according to the scientific community. This was made abundantly clear in the 2021 Intergovernmental Panel on Climate Change (IPCC) AR6 report, which indicates that greenhouse gas (GHG) emissions are at historically high levels and if left unchecked, the impacts to our economy, environment and society will be significant, representing a global risk to markets and communities. The scientists’ message is that the next decade is decisive. We must all follow the science and embrace our responsibility to keep global warming to 1.5 degrees above pre-industrial levels.
At ADM Capital we view Environmental, Social and Governance (“ESG”) integration as part of our fiduciary duty and broader responsibility under our stewardship and Engagement policy. We believe that as a fund manager we have an important role to play in supporting our portfolio companies’ social and climate outcomes. Integration can mitigate potential environmental and social risks that would otherwise reduce an investee company’s financial viability and also help identify business opportunities.
Each component of our SMS is listed below. The ESMS outlines the assessment and regulation of sustainability factors and risks as part of our investment due diligence processes, ownership and exit. We view ES and sustainability integration as key to our private credit strategy and part of our fiduciary duty. This has been the case since the establishment in 2006 of the ADM Capital Foundation, a philanthropic vehicle created to support critical research and impact-driven approaches to environmental conservation.
We also recognize the importance of our role in actively engaging and supporting our portfolio companies to improve their social and environmental outcomes. Our governing policies, including ‘Climate Change, ‘Anti-Slavery and Human Trafficking, ‘ESG; ‘Stewardship and Engagement, and ‘Diversity, Equity and Inclusion, underpin our whole sustainability process.
ADM Capital’s exclusion list is the initial step in our E&S due diligence process and is based on IFC’s exclusion criteria as well as relevant criteria from other LPs.
For example, we will not invest in companies with significant involvement in producing, marketing or distributing tobacco, gambling, casinos and equivalent enterprises, nuclear power, pornography, firearms or military weapons. Our full exclusion list can be found here.
ADM Capital Foundation designed the ADM Capital ESG Toolkit (“Toolkit”), which provides analysts with sector-specific knowledge of ESG risk and opportunity factors. The toolkit generates a simple rating system, providing appropriate due diligence questions to support the analyst through KPI setting and ESAP development with companies. The toolkit is based on the Sustainability Accounting Standards Board’s (“SASB”) industry standards, in-house research and MSCI’s ESG ratings methodology.
ADM Capital Foundation (ADMCF) has supported ADM Capital’s ESG integration with advisory and research over a number of years. The former CEO of ADMCF sits as a sustainability observer to ADM Capital’s Investment Advisory Committee (IAC).
Independent E&S consultants are engaged to conduct E&S due diligence based on IFC Performance Standards gap analysis ahead of any transaction. Our analysts work proactively with the consultants to understand any E&S risks and opportunities relative to the potential investment.
Following E&S due diligence, our third-party providers build an ESAP for each transaction that identifies key E&S risk factors and guides sustainability mitigation or enhancement based on IFC Performance Standards. The ESAP is broken down into identifiable and measurable timebound and budgeted actions that we require our borrowers to complete. These are included in our loan documents.
We believe data is integral to capturing our E&S impact on a company and allows us to identify means for a company to improve. We set KPIs to capture ADM Capital’s value add, both in a transaction and across our funds. We have used SASB Accounting Metrics as a guideline to be more industry specific in terms of impact and opportunities.
We are working to align our KPIs with the 2015 Sustainable Development Goals (‘SDGs’).
The collection of 17 interlinked goals are designed as a “blueprint to achieve a better and more sustainable future for all”
We monitor ESG performance through regular engagement with our companies, managing compliance with IFC Performance Standards through Environmental Social Action Plans (“ESAPs”) and by setting Environmental and Social Indicators for each transaction. We seek board director or board observer status whenever possible and this helps us work closely with borrowers. ESAP completion is verified by a third-party consultant annually and we ensure ESG representation, warranties and covenants are incorporated into transaction documents and evaluated for compliance.
Our companies report on environmental and social KPIs semi-annually and investors receive quarterly reports, which includes ESG data. We produce an annual sustainability report, disclosing the performance and progress of our portfolio companies. In 2022, we published our first climate report following the recommendations developed by the Task Force for Climate-related Financial Disclosures. We are also the first Asia ex-Japan signatory of the Principles of Responsible Investment in 2008 and provide an annual and disclosed report to PRI.
Our approach to remuneration integrates sustainability considerations. Bonuses can be adjusted as appropriate to reflect behaviour and performance in relation to sustainability and ESG compliance in transactions.