RECI's Approach to Sustainability
RECI aims to operate in a responsible and sustainable manner over the long term. The Company prioritises continuous enhancement of ESG credentials across the portfolio, and its success is aligned with the delivery of positive outcomes for all its stakeholders, not least the communities in which the buildings that it finances, live, work and enjoy.
The Company’s main activities are carried out by Cheyne, the Investment Manager, and as such the Company adopts the Investment Manager’s policy and approach to sustainability and integrating ESG principles.
The Investment Manager was one of the initial signatories to the Standards Board for Alternative Investments (formerly known as the Hedge Fund Standards Board) and is a signatory to the United Nations-supported Principles for Responsible Investment (“PRI”). In its most recent assessment, Cheyne scored 4 stars out of 5 in all modules bar one. Cheyne received a score of 68% (4 stars out of 5) in the Investment and Stewardship Policy module (where the PRI median was 62%). Over 40% of its sub-indicators in this module received a perfect score.
Several standards and codes have received prominence as metrics for investment managers. These include, for example, the UN Principles for Responsible Investment (UN PRI), the Task Force on Climate-related Financial Disclosures (TCFD), the Financial Reporting Council’s Stewardship Code, and the FCA’s Sustainability Disclosure Requirements (SDR).
The Investment Manager’s ESG Implementation Forum oversees both the Responsible Investment and ESG policies to ensure that it continuously improves its ESG standards. Its Responsible Investment policy is already incorporated into its investment process.
Cheyne Real Estate Core ESG Principles
Cheyne believes that an overarching focus on ESG considerations is entirely aligned with our investment goals.
- Sustainability credentials directly support real estate valuations
- Sustainable, energy efficient buildings are more valuable to asset owners by:
- Supporting higher rents, lower vacancies and lower operating costs
- Supporting exit valuations.
ESG considerations in our investments are not merely a passive analysis but rather the opportunity to effect positive change.
- Cheyne Real Estate is a key stakeholder in our investments, frequently the sole lender to a real estate asset
- This provides the ability to directly engage with all new sponsors to help drive the ESG agenda directly and seek to address any deficiencies and opportunities to improve sustainability credentials of the asset
- This is particularly relevant in development, value-add and transitional financing, which represents a core focus for Cheyne Real Estate.
Incorporating Sustainability into the Investment Process
Due Diligence
RECI is primarily invested in real estate loans and other real estate-based debt investments. Key factors taken into consideration, where appropriate and possible, are best-in-class environmental, design and construction standards, a focus on Building Research Establishment Environmental Assessment “BREEAM” ratings, governance rights and engagement with sponsors. Sustainability risks are considered during the Investment Manager’s initial due diligence in respect of an investment opportunity, including as part of the external valuations of the real estate being financed (such valuations typically consider any environmental and/or social risks) and early engagement with potential borrowers or issuers through a data gathering exercise.
The Investment Manager’s analysts also compile reports using data gathered from their own due diligence and external reports, environmental performance indicators (including BREEAM ratings and Energy Performance Certificates) and investigations (including through the use of forensic accountants and other third-party consultants). This information is included in the investment committee memorandum, which is considered by the Investment Manager’s investment committee prior to an investment being made.
Decision-Making Process
Sustainability risks are considered as part of the investment decision-making process for RECI. In particular, the following sustainability risks are typically considered, both in respect of the real estate being financed and/or the relevant borrower or issuer:
- Environmental: power generation (including its sustainability), construction standards, water capture, energy efficiency, land use and ecology and pollution.
- Social: affordable housing provisions, community interaction and health and safety conditions.
- Governance: management experience and knowledge and anti-money laundering, corruption, and bribery practice.
Ongoing Management
Sustainability risks also form part of the ongoing monitoring of RECI’s investments, with regular reports and ongoing engagement from borrowers and issuers incorporating information related to sustainability risks provided to the Investment Manager. Where appropriate, the investment team will assist borrowers and issuers in addressing ESG-related issues and support its borrowers’ and issuers’ efforts to report externally and internally on their ESG approach and performance in relation to material sustainability risks.
Exit
ESG considerations are already having an impact on underlying real estate values and whilst clear data driven evidence is in its infancy, the investment manager is acutely aware that during the life of the loans that RECI is writing, this will become much clearer. As such this is an important consideration regarding risk analysis now, hence the approach above is an integral tool when calculating, managing and measuring risk.