Framework, Schmamework: ESG that focuses on improvement over exclusion

"We’ve been doing ESG far, far longer than it’s been fashionable,” Niall Mills, Global head of Igneo Infrastructure Partners commented at a recent investor update.

The problem with ESG becoming more fashionable in recent years is that frameworks used to prove ESG credentials can also serve to detract from the quality of the actual implementation. Companies and funds choosing exclusion over improvement is an example of how the indiscriminate application of ESG frameworks can undermine a genuine ESG approach.

Like many investment firms, Igneo Infrastructure Partners has set a target to achieve Net Zero emissions within each of its funds by 2050, a commitment in line with the movement of countries globally to tackle the climate crisis.

Indeed, countries that account for around 70% of global emissions of CO2 have now pledged to be Net Zero by 2050 in an effort to limit the rise of global temperatures to 1.5 °C, the International Energy Agency has noted.

In order for these countries to make good on their pledges, it will take some major behavioural and structural changes within the sector as well as within companies . Some sectors are more advanced in their net zero pathways than others.

Taking sectors and companies from nascent stages of their energy transition journeys to full decarbonisation will require some seriously heavy lifting and won’t be possible if investors decide to exclude those companies with exposure to the worst carbon emitting assets. These companies require transition and improvement plans to get where they need to be; lack of financing and investment in these areas will stall global emissions targets and frankly misses the point of what net zero targets are trying to achieve which is a transformation of business models and economies towards more sustainable energy sources.

We see many examples in the marketplace where companies are being overlooked because of their less desirable ESG footprints despite the improvements a long-term investor with patient capital and an innovation mindset could bring over time. Everyone wants to talk about decarbonisation now which is great, but because it’s such a hot topic investors don’t want to be associated with coal at all, making the refinancing deals with coal operators very difficult.

MVV – a case study

Igneo’s investment in Mannheim-headquartered MVV Energie is a good example of the approach we take working with companies despite exposure some other assets investment firms might consider to be a ‘show stopper’ such as coal power generation. As long as we can come to terms with the potential risk of owning such assets, we consider transition and improvement towards cleaner and more efficient energy an essential part of the global energy transition. This approach has not changed even as the measurement and reporting of ESG standards have.  

Founded in 1974 and headquartered in Mannheim, Germany, MVV is a an integrated utility covering all stages of the energy value chain including generation, distribution, trading and supply with activities across Germany, UK and the Czech Republic. In addition to its electricity, gas, water and heating grids, Energy-from-Waste plants, biomass plants, onshore wind farms and biomethane plants, it also has strategic investments in coal-powered district heating in the Czech Republic.

Since acquiring MVV in July 2020, Igneo Infrastructure Partners has halved the time the company will stop using coal – originally the company had set a target in line with Germany’s timeline to phase out coal by 2038. Igneo made a business case for MVV to be operating without coal by 2028, a decision it made before the German government recently changed its domestic phase-out timeline to 2030.

In addition to measuring the impact of our continual improvement approach to ESG through the case studies within our portfolio companies like MVV, we are also seeing it across our portfolios. Igneo’s latest data shows we have decreased emissions intensity by more than 40% since 2018, with emissions decreasing across our funds on an absolute basis even with the firm’s improvement over exclusion philosophy.

Our 5 minimum standards

The sometimes over-zealous nature of the ESG discussion is at a point now where investors don't want to touch coal along with oil and to a lesser extent nuclear and natural gas energy production which are responsible to CO2 emissions. This exclusionary approach isn’t appropriate in our view as our emissions reduction targets require investors to engage with the problem rather than just ignore it.

When we do due diligence, a company that is currently making a lot of revenue from fossil fuel value chains would obviously be flagged as a risk and we would only acquire that company if we saw scope to improve and basically reduce exposure to fossil fuels in line with a transition to sustainable energy.

We use our five minimum standards as a way to create and track proactive change within our portfolio companies and while these are non-negotiable, the application of these standards doesn’t mean every company needs to meet every one of them from the day of the investment. We implement these standards with a view to focusing on actions rather than with a benchmarking framework of questionnaire in mind.