Schroders Capital: Sourcing impact investments post-SFDR

The Sustainable Finance Disclosure Regulation is becoming inextricably linked with the impact investment process, says Amara Goeree, sustainability director, private equity at Schroders Capital.

This article is sponsored by Schroders Capital.

What is your impact philosophy and how does it align with external frameworks?

We have a single impact philosophy that spans all asset classes at Schroders, both public and private. That philosophy is supported by one coherent methodology that follows the Operating Principles for Impact Management, as well as the Impact Management Project guidance. 

Amara Goeree, Sustainability director, private equity at Schroders Capital

This methodology reflects our own ideas about impact intention, contribution and measurement, while also being informed by these two external frameworks. In terms of our philosophy, we are looking for impact alongside financial returns. 

How has Schroders been able to leverage the expertise of BlueOrchard in formulating its impact approach?

Schroders has always had a strong focus on sustainability, but the acquisition of BlueOrchard in 2019 accelerated our impact approach, becoming a central pillar of the firm’s investment ethos as well. They played a key role in putting impact investment on the map for Schroders Capital, internally and externally. In Schroders’ impact approach, we have used a lot of BlueOrchard’s processes and translated them into a more general framework that can be applied across companies, infrastructure and real estate.

What do you look for in an impact investment? 

Within private equity, we use the UN’s Sustainable Development Goals for guiding impact investment themes. We screen investment opportunities for the potential positive contribution it may have to achieving an SDG. When identified, impact intent will be defined (in collaboration with the GP and company) based on a pre-defined set of intentions, which all have suggested KPIs to measure the impact. We will also assess the investments’ potential and that of our contribution. 

We talk to our existing GPs, as well as emerging GPs and placement agents, in search of interesting funds and direct/co-investments. 

Intent is very important. It could be that we see the impact potential, but the GP or company does not. In that case, that investment would be screened out. 

Once we have established intention, we look at KPIs to measure outcome. Ideally, there will already be a baseline in place – it helps to have a number of years of data so that we can see progress – but this is also something we can assess going forward. What is important is that there is a clear theory of change that is agreed upon. 

Finally, we look at what our own influence can be, including engagement and guidance on maturing the impact approach of the target company.

As an impact investor, is Article 9 status essential for you when seeking out potential fund investments?

It is a great starting point for any GP globally. As an EU regulation, in Europe it will almost always be required. We will have some flexibility outside of Europe and in some other specific instances. However, those funds should still meet our objectives and be able to report against them.

We have used subsets of SDGs as sustainability objectives, but if, for example, a fund covered an SDG that was not in scope for us, we would run the risk of diluting our investment focus away from our stated objectives. Having that clarity is therefore important to ensure our objectives match with that of a target fund.

In theory, as the Sustainable Finance Disclosure Regulation is a transparency regulation, it should be possible to reserve a small bucket for funds that are not Article 9, so long as they meet all our disclosed objectives. 

What are some of the challenges that GPs, and particularly smaller managers, face in achieving Article 9 status? 

A few years ago, when we started looking at SFDR, we thought large funds and very specialised boutiques would spearhead the transition to Article 8 and Article 9 status due to the meaningful know-how and resources required to get going (understanding requirements, implementing systems and processes, and so on) and also on an ongoing basis (expanded reporting requirements, for example). 

However, we have been positively surprised to see many small funds leading the way. This probably has to do with the fact that Article 8 and Article 9 status does help some of these specialist managers to better formulate and articulate their strategies towards LPs, and the fact that many of the smaller, more entrepreneurial GPs are faster at embracing change. For GPs that were already integrating sustainability and impact assessments into their investment process, SFDR is helping them formalise their approach, but not fundamentally asking them to re-think and re-do everything.  

Additionally, Article 8 and Article 9 status can help GPs to tap into additional sources of funding. Many advisers and placement agents have also picked up on these benefits and are actively advising smaller managers to strongly consider the transition.  

At Schroders we strongly believe that there is significant value for GPs to be gained as well, so we invite our GPs to approach us when they embark on this journey. Wherever possible, we are happy to share our insights and experiences. We believe engagement with our GPs in sustainability and impact is part of our commitment to their businesses and to our investors.

The early days of SFDR have brought with them a lot of confusion about Article 8 and Article 9 funds. Are we starting to see more clarity?

Within Schroders Capital, we have started to get a lot more comfortable with the definitions when compared to 18 months or two years ago.

When it comes to the delineation between Article 8 and Article 9, I think it is relatively clear. This is a transparency regulation – as long as you clearly define your intention and follow through on that process in your reporting and communications, if implemented for the right reasons and rigorously, Article 8 and 9 can be a real quality stamp. 

What impact do you think SFDR will have on greenwashing?

SFDR has a very positive impact on fighting greenwashing overall. There’s always going to be more and less rigorous implementations and it is up to LPs to scrutinise this in detail. But as a regulatory framework it is very solid.