These ESG-related risks and opportunities may vary by country, industry and by characteristics specific to an issuer, such as size and geographical footprint. However examples of each type of risk could include the following :

Environmental, Social and Governance (ESG) Investment Management relates to how Arequitie incorporates ESG factors into its investment activities.

Investment analysis of non-financial factors commonly referred to as ESG factors encompasses those aspects of an issuer’s operations that influence its ability to meet its financial obligations.

01

Environmental

Climate change potentially raises the risk of natural commodities like oil & gas, or coal being ‘stranded’ due to regulation which prevents them from being developed commercially.

02

Social

Unethical and unsafe employee or supply chain practices can pose a potential operational or security of supply risk for retailers and manufacturers if a supplier's facilities are shut down or impacted by accidents.

03

Governance

Lack of appropriate board oversight and decision-making structures can undermine investor confidence in management.

Incorporating ESG Into Our Investment Activities

Our investment team discuss the importance of ESG and how we incorporate it into our investment process. We integrate ESG into all aspects of investment decision-making and ongoing portfolio management, including portfolio construction, financial models and business plans, investment valuations, monitoring portfolio company performance and engaging with their management teams.

ESG is embedded throughout our investment process, starting with the initial due diligence through to the exit of the investment. Below is a summary of how we integrate ESG factors.



Due Diligence



During the initial due diligence phase, we proactively identify material ESG risks and opportunities relevant to the potential investment. In doing so, we leverage our investment and operating expertise and utilize industry-specific guidelines that incorporate SASB guidance. We perform deeper due diligence if required, utilizing internal experts and third-party consultants as needed.

Investment Committee Approval



All investments made by Arequitie must be approved by the applicable Investment Committee, which makes its decision based on a set of predetermined criteria. To facilitate this, investment teams provide the Committee with a detailed memorandum, outlining the merits of the transaction and material risks, mitigants and significant opportunities for improvement, including those related to ESG, such as bribery and corruption risks, health and safety risks, and environmental and social risks.

Ongoing Management



As part of each acquisition, investment teams create a tailored integration plan that includes, among other things, material ESG-related matters for review or execution. Arequitie actively looks to advance ESG initiatives and improve ESG performance to drive long-term value creation, as well as to manage any associated risks. We believe there is a strong correlation between actively managing these considerations and enhancing investment returns. It is the responsibility of the management teams within each portfolio company to manage ESG risks and opportunities through the investment’s life cycle, supported by the investment team responsible for the investment. We have seen that the combination of having local accountability and expertise in tandem with Arequitie’s investment and operating capabilities is important when managing the wide range of asset types across jurisdictions.

Exit



We prepare robust business plans outlining potential value creation from several different factors, including ESG considerations, as part of our divestiture plan. We also prepare both qualitative and quantitative data that summarize the ESG performance of the investment and provide a holistic understanding of how Arequitie has managed the investment during the holding period.

Approach & Performance

Arequitie believes that ESG factors can potentially have a material impact on an issuer’s long-term financial performance. Given the limited upside (and potentially significant downside) of fixed income investments, the focus of our ESG analysis is on understanding downside risks.

Poorly-managed ESG risks can lead to inefficiencies, operational disruption, litigation and reputational damage, which may ultimately impact an issuer’s ability to meet their financial responsibilities. Supplementing traditional financial analysis by reviewing ESG-related management practices and performance is therefore not only prudent but also in line with Arequitie’s fiduciary duty to optimise investor returns.

As part of our membership of the UN-supported PRI, we participate in an annual Reporting and Assessment procedure, and receive a report on how well we have performed in terms of ESG integration within our investment process. We believe the PRI reporting and assessment framework can be a useful independent benchmark for our efforts.