Aqua Capital: sustainability in the investment cycle

PRI Awards 2024

Organisation: Aqua Capital 

Signatory type: Investment manager 

HQ country: Brazil 

The approach, initiative, or process 

Aqua Capital is a private equity firm, headquartered in Brazil that manages investments in innovative and sustainable businesses throughout the agriculture and food value chain across the Americas. We aim to be the preferred partner for mid-sized, high-potential companies in our sector, supporting the transition of family-owned companies and management teams, combining their operational expertise with our entrepreneurial approach.

We understand the importance of sustainability for company development. Impact is a core pillar of our PGTI (professionalise, grow, transform and impact) value-creation methodology and we have designed an ESG+I (impact) agenda. These initiatives work alongside one another to ensure effective risk management and positive impact.

We have a clear ESG+I vision to transform agriculture and food sectors and companies in a manner that amplifies their sustainability and their positive impacts associated with climate change, food security and health and wellness. Guided by this vision, we have created a theory of change, with the aim of achieving the following impacts.

• Increase sustainability across the agriculture and food sectors. In 2023, one company in which we invest received a gold medal for the EcoVadis assessment and another obtained BCorp certification.
• Strengthen the fight against climate change, avoiding deforestation/land degradation and protecting fresh water. By fostering the use of nature-based solutions in agriculture and increasing productivity, we avoided the emission of 30 million tons of CO2e in 2023.
• Enable sustainable healthy foods to achieve a healthier population. In 2023, we were able to encourage investee companies to replace the use of seven thousand tons of chemicals with biopesticides.
• Contribute to better performing societies and economies. By providing technical assistance to over 500 small dairy farmers, we helped them achieve production levels 180% higher than the national average, boosting local economies while promoting animal welfare.

To achieve these impacts, we have designed an ESG+I approach for value creation that encourages our investee companies to act based on four pillars.

1. Aim to invest in “do good” business models by investing in sectors in which positive impact is naturally embedded in the core business.
2. Bring about direct positive impact by creating quality jobs and ensuring economic development.
3. Execute bottom-line environmental projects by implementing practices that improve environmental performance while bringing financial returns.
4. Apply world-class ESG approaches by ensuring that our investments adopt the best ESG-related practices.

ESG+I is embedded throughout our entire investment cycle, from origination to exit. During the pre-investment stage, we:

• conduct due diligence using the International Finance Corporation’s Performance Standard as a benchmark;
• assess the five dimensions of impact (based on the Impact Management Platform);
• conduct a climate-related risk assessment using a quick-scan tool developed internally and a financial quantification tool developed by ERM NINT.

Once the company enters the portfolio, we:

• help it to implement the ESG+I action plan that was developed during the due diligence phase;
• monitor 48 key performance indicators semi-annually;
• assess the companies’ development using an ESG+I scoring system which covers seven main topics (ESG management system, licenses and permits, environmental aspects, occupational health and safety, employment and working conditions, other social aspects and supply chain management).

In 2023/24, we made underwent third-party assessments and improved mechanisms and tools to ensure the robustness of our stewardship. In 2023, our stewardship system was independently verified against the Operating Principles for Impact Management and benchmarked against peers by BlueMark, a leading impact investing independent verification company. We outperformed the benchmark in nearly all principles. Particular areas of good practice were highlighted in relation to:

• principle 3 – manager’s contribution to impact, for our direct involvement in and support of the development of portfolio companies’ ESG+I management systems and resource-efficiency projects;
• principle 4 – assessment of expected impact, with tools to assess companies’ potential contribution to our theory of change, UN Sustainable Development Goals and the five dimensions of impact (what, who, how much, contribution and risk);
• principle 7 – impact at exit, for assessing sustainability at and beyond exit, evaluating the company’s ESG+I maturity and gaps, as well as the effects that the exit process may have on the achievement of sustainability outcomes.

Additionally, we achieved a five-star performance for the Direct – Private Equity module of the PRI’s transparency report. Aqua Capital’s Fund II was ranked the best-performing fund in Latin America and top five globally, according to KFW DEG’s development effectiveness rating in 2023.

In 2023/24, in partnership with ERM NINT and IDBinvest, we developed a climate financial risk tool which covers:

• 12 agriculture and food sectors;
• two different geographies;
• three scenarios under the Central Banks and Supervisors Network for Greening the Financial System (current policies, delayed transition and net zero 2050);
• nine physical and transition risks.

This tool forecasts the effects that climate-related risks can have on companies’ operational costs, selling, general and administrative expenses, revenue and EBIDTA, according to the risks that are material to the sector.

The measures to ensure transparency and involve collaboration

Since our inception, we have ensured transparency with our investors and portfolio companies, and over the past years we have endeavoured to make information publicly available.

We publish our ESG+I Annual Report each year, which includes detailed information on the development and performance of our agenda, with a dedicated chapter for each portfolio company.

As a signatory to the Operating Principles for Impact Management, each year we disclose the details of how our stewardship system aligns to each principle.

In 2023, our stewardship system was independently verified against the Operating Principles for Impact Management by BlueMark. Within this process, BlueMark determined the level of alignment to each principle using four ratings: low, moderate, high and advanced. We obtained an advanced rating for five principles, high for two and moderate for one. These results are publicly available on the Impact Principles website and Aqua Capital’s website.

We also have a dedicated, publicly available website which hosts our compliance manual, code of conduct and all of our formal policies, as well as an integrity channel.

In addition to being a signatory to the PRI and the Impact Principles, Aqua Capital is a signatory of the Investors for the Climate (IPC) initiative which promotes the decarbonisation and resilience of Brazilian investors’ portfolios. We are also a member of the EcoVadis Private Equity Client Council, and most recently joined the Amazonia Finance Network (AFN). Aqua Capital supports the Black Jaguar Foundation, a project that aims to reforest the Amazon rainforest, promoting environmental sustainability while fostering collaboration with local communities and environmental groups.

As part of our approach, we conduct ESG+I training sessions for the Aqua team and portfolio companies. The main events are the Value Creation Days, which are held twice a year with all portfolio companies. The focus of the Value Creation Day is training and knowledge exchange among companies. Half of the day comprises specific forums, such as an ESG+I forum with a dedicated technical agenda. The other half of the day is dedicated to a seminar on a broadly applicable theme.

In 2023/2024, we engaged in collaboration with IDB Invest and ERM NINT to build capabilities for climate resilience and sustainability in the agribusiness sector. This project consisted of:

• Reviewing our policies, processes and tools regarding climate change.
• Providing four capacity-building sessions for the Aqua team and portfolio companies.
• Developing a climate financial risk tool.

This project equipped portfolio companies with the knowledge they require on climate change and the associated risks, and allowed us to make more detailed assessments and informed investment decisions.

 

PRI disclaimer: This case study aims to contribute to the debate around topical responsible investment issues. It should not be construed as advice, nor relied upon. It is written by a guest contributor. Authors write in their individual capacity – posts do not necessarily represent a PRI view. The inclusion of examples or case studies does not constitute an endorsement by PRI Association or PRI signatories.