EdenTree Investment Management: Clean water, energy and climate change

EdenTree Investment Management 

Signatory Type: Investment manager 

HQ Location: London 

Assets under management: £3.7 billion 

 

Covered in this case study 

Asset class(es): Fixed income 

Geography: Global 

Sector(s): Utilities, Water 

 

EdenTree launched one of the first ethical investment funds in 1988, and our responsible investment approach since then has focused on four pillars: research, screening, engagement and governance assessment. Through these, we seek to catalyse positive change and encourage best practices in the companies we invest in. In this case study, we outline how our approach helps to support the UN Sustainable Development Goals (SDGs) and demonstrate how we applied this in the analysis of a bond issued by Severn Trent. 

Why we focus on SDG outcomes 

With global consumer preferences increasingly influenced by sustainability, the demand for tangible impact measurement is growing. We also realise that sustainable development requires a vast amount of funding, of which there is a shortfall.  

Our investment approach seeks to generate positive, measurable outcomes for people and planet, alongside market-competitive financial returns, by focusing on solutions to the world’s most pressing sustainability challenges, such as education, health and wellbeing and social infrastructure.  

This forms a core objective of our Global Impact Bond Fund, where we focus on the positive impact generated by corporate debt issuers, principally by investing in ESG-labelled bonds and un-labelled bonds that can help finance tangible sustainable outcomes.  

How we focus on SDG outcomes 

Our Global Impact Bond Fund aims to deliver on its impact objectives in a disciplined and transparent manner. This includes conducting a holistic analysis of bond issuers using our proprietary impact assessment framework, combined with in-depth fundamental credit research (see Figure 1).

Figure 1. The EdenTree Global Impact Bond Fund investment process

Our impact assessment framework builds on established frameworks developed by organisations such as the Global Impact Investment Network, Impact Investment Institute and the Principles for Responsible Investment. 

Impact investing in public debt remains relatively new, but the universe of instruments we can invest in that are linked to projects designed to generate positive outcomes is expanding.  

Although our ability to influence issuers’ contributions to the UN SDGs is somewhat limited as bondholders, we are committed – as responsible investors – to driving positive outcomes through active ownership. This includes applying our impact criteria to the issuer, not just the investment instrument.  

In our Global Impact Bond fund, we focus on three widely accepted pillars of impact investing: intentionality, contribution and measurement, as well as paying specific attention to any potential adverse impacts:

1. We start by assessing the intentionality of a prospective investment. The issuer needs to have clear objectives about the impact that the bond is aiming to generate. We consider the stakeholders that the issuer identifies while formulating environmental and/or social objectives, along with the ambition attached to relevant targets.
2. We also gauge an issuer’s contribution, seeking to establish whether planned projects a) fulfil a sustainability need that may not have otherwise been met; and b) (ideally) target communities or individuals that are underserved. We ask which, if any, SDGs the issuer has sought to contribute to by deploying the proceeds of this investment instrument, and what underlying SDG targets it has identified.
3. The desired outcomes must also be measurable – issuers should commit to regularly disclosing non-financial key performance indicators (KPIs) that are tangible and comparable among peers and/or the broader sector, where possible.
4. Finally, we consider it imperative that issuers seeking to generate positive outcomes operate responsibly, by endeavouring to mitigate adverse impacts resulting from their wider business activities.

As such, we expect issuers to address potential negative outcomes across their operations, covering the following areas: business ethics, corporate governance, community, employment and labour, environment and climate change and human rights.

We also incorporate values-based screening^[1] in our analysis to enforce the absence of harm (see categories highlighted in Figure 2). We aim to ensure that the outcomes generated by the issuer are indeed positive, particularly as recourse is typically to the issuer rather than the specific projects. 

When undertaking our impact analysis, we divide investments into four categories: fail, below average, average, and above average. We draw on various quantitative and qualitative factors to produce a conclusion. 

Figure 2. Values-based screening

Example: Severn Trent 

Severn Trent is a water company that provides water management and wastewater treatment services to residential and industrial customers in the United Kingdom. Our Global Impact Bond Fund has invested in the £400 million Severn Trent 2.625% 2033 sustainable bond since its issuance in early 2022.  

The funds raised from this bond will be deployed towards projects with positive environmental and social impact, such as enhancing water quality, increasing biodiversity, generating renewable energy, and ensuring water services are affordable. 

Below we outline how we assessed the company using our impact framework.

Intentionality – Severn Trent states clear positive impact objectives within its annual sustainability report and as part of the sustainable debt framework it uses to determine the allocation of its bond proceeds.

As a company responsible for wastewater treatment and distributing clean water to 4.6 million households per day, Severn Trent identifies SDG 6 (Clean Water and Sanitation), SDG 7 (Affordable and Clean Energy) and SDG 13 (Climate Action) as core outcomes its business can drive.  

Alongside its adoption of the ICMA Green and Social Bond principles and associated product categories for its sustainable debt issuance programme, we believe this demonstrates above average intentionality. 

Contribution – The company has made multiple, material green and social outcome-focused commitments, including working with farmers to reduce agricultural discharges and pollution; reducing leakages by 15% over the next three years; supporting affordability by increasing the number of customers on social tariffs; and offering 1000 jobs in social mobility cold spots.

It also boasts an exemplary record in minimising pollution incidents, scoring a sector-leading 18 out of a possible 20 Environmental Protection Agency stars, compared to an average of 13 for its water utility peers.

Measurement – The instrument’s positive impact KPI targets are clearly defined, measurable and ambitious, with company targets revisited annually to determine progress:

• 100% annual renewable energy generated by 2030  

• net-zero operational carbon emissions achieved by 2030

• 15% reduction in leakage level to 363.5 megalitres/day reached by 2025 and a 50% reduction reached by 2030

• 1090 hectares of land conserved and enhanced by 2025 

• 2100 km of river ecology improved by 2025 

• 195,000 customers provided with support through help-to-pay schemes by 2025 and water poverty eradicating by 2030

Responsibility – As an entity, Severn Trent does not generate revenue in any of the business areas captured under our ethics / values screens. We also scored it favourably in our responsibility analysis, notably on environment and climate change and corporate governance.

Severn Trent is also aligned with our sustainable solutions and education thematic pillars, as outlined in the figure below:

Figure 3. Assessing Severn Trent on negative & positive outcomes

Engagement 

Although the focus of this case study has been on the three key pillars of impact investing – intentionality, contribution and measurement – engagement is also a vital part of our investment approach.  

Between January and February 2022, we engaged with eight UK water and wastewater utilities, including Severn Trent, as well as various regional and national river trusts.  

Our objective was to halt deteriorating performance and to better understand sector challenges in improving areas of weakness, including:  

• The nature of pollution incidents and environmental fines and penalties 

• River quality – perception, challenges, investment and improvement

• Beach quality (where relevant) and investment in sewage outflows etc 

• Biodiversity with an emphasis on impact and adding to biodiversity 

• The use of ‘nature based solutions’ and technology to improve performance 

• The regulatory regime and whether this is enabling investment in river quality  

• The role of investors including public policy (government, regulators and Environment Agency) 

The condition of our rivers: A thematic engagement (2022) provides further detail on our engagement with Severn Trent and other UK water companies. 

 

EdenTree Investment Management Limited (EdenTree) is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association. Firm Reference Number 527473.