EcoAct’s Stuart Lemmon speaks to Ralph Hora, partner at Pemberton, about how the independent asset management group is addressing climate change, setting ambitious targets, overcoming challenges and seeing ESG as an opportunity.
Where is Pemberton on its net-zero journey? What are your targets milestones, and what have you achieved so far?
There has been a huge shift on climate change. Everybody now recognises that this is one of the big tasks ahead of us that needs to be tackled. At Pemberton, we put our heads together around two and a half years ago to decide how we would address it. We decided to join Net-Zero Asset Managers initiative as a way to progress our journey to net-zero and really address the need to do something on climate change.
Key steps we have taken include tracking, monitoring and reducing our energy usage. We have been a carbon neutral firm since 2020 and we’re doing that via offsetting. We felt this is a crucial first step, that we are not only holding our portfolio companies true to reducing their greenhouse gases but as a manager, we want to contribute to that as well. We try to really use our position as a financing partner. We have around 100 private equity sponsors and portfolio companies across Europe and the US in our scope, and so we are encouraging them to also reduce their greenhouse gas emissions. We’re doing this mainly via a positive and negative selection when we engage with them in the investment process via a questionnaire. In December 2020, we also introduced our so-called margin ratchet.
Pemberton are clearly taking this seriously; can you tell us more about the drivers for this ambition on climate?
Nowadays it has become clearer and clearer that ESG factors, including reducing greenhouse gas emission is absolutely crucial to achieve long-term goals and it is this achievement of long-term goals in terms of our portfolio companies that is very important because it is related to performance. We believe that companies perform well on ESG factors and fundamentals are stronger and more profitable. This is absolutely the main driver of our climate ambition. This is because in managing money for our clients, we select the best opportunities to invest and we feel that if there are ESG factors and portfolio companies with strong ESG governance, then this is a good indication for growth. This has changed significantly because in the past ESG was sometimes categorised as a group of risk factors, things to be avoided.
With Pemberton’s net-zero approach, do you see it about avoiding risk or is it about opportunity as well?
I think both really. When we look at our investment process and the negative and positive screening, then obviously the negative ones are coming more from a risk perspective. There are certain industries, companies, business models that we do not invest in. But from the opportunity side, we look at companies and their business model and how they perform especially on reducing greenhouse gas emissions. Where we see a company making particularly big efforts to reduce their greenhouse gas emissions, then we would definitely consider this as an opportunity.
What is Pemberton’s engagement process around the questionnaire for your portfolio companies?
I don’t really consider the positive and negative screening as an engagement. This is just something that we do at the beginning, as a really basic screening. What then comes up in terms of engagement, we reach out with our questionnaire which is very detailed on ESG, carbon footprint and emissions. We then analyse the company performance. We are then in close contact with them, because we are in private debt with either the Private Equity (PE) sponsor or with the company directly. So, we have a bilateral relationship with the company and what we try to establish here for instance are the positive attributes of governance. We then engage further with the company, helping them to improve their greenhouse gas emissions or other ESG factors. This is our initial engagement, but this continues when we invest with the company for the duration of the loan, which is seven years.
Were there any challenges in adopting Pemberton’s ambitious approach to climate and what have you done to overcome them?
At Pemberton, we have considered ethical investment and our governance since our inception. This has always been very important to us. Now everybody has started to talk ESG, but initially it was all very new. Back then, we looked at our own investment and our own risk process. In 2018, we became a signatory to the UN PRI which meant we had to look very carefully at the questions they asked, their set-up, and that helped a lot. We used it to develop this ESG approach in terms of information, reporting and transparency. Starting on this journey is relatively easy but what I think is particularly challenging is to stay true to it over the long-term.
We are also now seeing a tremendous increase in questions from Limited Partners (LPs) and from sponsors on ESG, specifically on the reduction of greenhouse gases. What is challenging is that there is a natural contradiction because we are predominantly supporting growing companies but at the same time wanting them to reduce their emissions. Previously there was not much external guidance in terms of reporting, how to do things, what is requested and so on. So, a lot of the stuff we had to create internally. We had to try to get our heads around what is important and what needs to be done. And this obviously was challenging as well but we are getting there. So, this is a very good thing. One way we are also addressing challenges is through collecting data on what we are doing. We have our own database model for capturing the data because, as they say, you only can manage what gets measured.
Has Pemberton’s net-zero drive moved away from specific sustainability and ESG teams, and becoming everybody’s responsibility through data collection and reporting and engagement?
Yes, absolutely. When we started to improve and focus more on ESG in 2019, we trained everybody in our workforce. And this initiative comes from the top, our chairman, managing partner and our Chief Compliance Officer all sit on our ethics committee. And we ask each and every one from Pemberton to be responsible for their behaviour around their footprint and ESG. Luckily, now due to global developments, climate is at the forefront for everyone at the moment, which makes our climate journey easier and everyone wants to get on board.
Earlier you mentioned a ratchet approach with your portfolio companies. Can you tell us more about this mechanism?
Our margin ratchet is a very powerful tool which we embedded in our financings back in December 2020. It is now included in about 50% of our deals, so it’s really significant. The ratchet allows the borrower to achieve a margin discount. And there are certain KPIs, for instance, one KPI is that we ask the portfolio company group if they are either net-zero on carbon dioxide emissions, or they are willing to reduce their carbon dioxide emissions at least 20% year on year. We have five other KPIs and if all KPIs are fulfilled, and this needs to be certified by an unbiased third party annually, then the company will achieve a margin discount. The importance of this is that it isn’t commitment from us, but a commitment from the portfolio companies and this is really translating ambitions into really measurable financing costs.
They are significant numbers that you’re driving, 20% year on year is very impressive. Is it welcomed by the people you’re investing in? Do you feel that they want to be part of this change?
Yes and we are absolutely excited about that. And we have had a lot of good feedback from the LPs. We are seeing more and more action in the PE world and from the PE sponsors, where they are asking for this margin ratchet as well. This embodies what we set out to do back in 2018 – not that we invented it, but we started with it then and we are seeing more and more engagement in that. And obviously something like this margin ratchet absolutely helps to address the challenges.
You mentioned UNPRI and the Net-zero Asset Managers initiative, do you see that sort of collaboration with the rest of the industry as being an important driver for change?
Absolutely, and this is why we decided to join both organisations and we feel that this gives the right kind of framework to work on and align with. And I expect that over time, all these initiatives will be more aligned to each other. You now see that the reporting for the UN PRI is similar to that of the Net-zero Asset Managers Initiative. It is becoming more synchronised, and this is a good thing because it makes the process easier than three institutions having three different reporting frameworks, different terminology, different guidance etc. We welcome more unified reporting and it makes sense because it helps to really streamline processes and means more companies get on board.
Can you tell us about Pemberton’s offsetting strategy and the part that it plays in in your approach?
We measured the carbon footprint of our eight European offices and analysed it with EcoAct. We are now offsetting with a project in Colombia. Offsetting is important and I’m absolutely proud of what we are doing. We are also working with EcoAct to embed our strategies and are following industry best practice to reduce our emissions.
What have you been most proud of in your net-zero journey?
This year Pemberton was awarded the ESG Initiative of the Year award at the Asset Management Awards 2021 by Money Age and we have also been shortlisted for a couple more awards. It is very nice for our efforts to be recognised and to get a confirmation that you’re absolutely on the right track.