How Colesco puts sustainability first - Danny Vroegop (Co-founder and Chief Investment Officer)
How Colesco puts sustainability first
Colesco Co-founder and Chief Investment Officer Danny Vroegop discusses the firm’s commitment and dedication to responsible investing.
Many firms highlight their commitment to responsible investing. What makes Colesco stand apart?
Responsible investing is the foundation of everything we do. Our core investment themes focus on supporting companies driving the transition to producing and supplying food in a more sustainable way; businesses accelerating the shift away from fossil fuels to sustainable alternatives; and companies striving to build a more inclusive society by offering products and services that widen access to healthcare, education and the benefits of digitization. It’s rare to find a private debt specialist with such specific sector focus that goes hand in hand with its clear ESG goals.
Importantly, we are a new platform, but we’re not new to ESG. I conducted my first ESG assessment two decades ago. The rest of the team has similar depth of experience. Colesco evolved out of Rabobank, where ESG has been a priority for years. Historically, Rabobank has been operating in sectors that play a key role in the transition towards a more sustainable future. While Colesco operates as a distinct business, we can access the bank’s wealth of ESG-related resources, most notably, its ESG scoring methodology and its database of ranked businesses. The bank has been collating this information for over twenty years. Being able to tap into that is a huge advantage for us. And unique.
How do ESG and sustainability considerations play into your deal selection?
Responsible investment is an integral part of our strategy. This is the benefit of starting with a clean sheet: ESG is not an add-on to current processes. It’s by design a key building block in every stage of the investment cycle. Anyone can apply a negative ESG screen to exclude businesses from its pipeline. We go a few steps further to implement a positive selection process using Rabobank’s ESG scoring methodology, assess the industry challenges, net zero alignment of the company, climate risk materiality, and so on. In addition, we benchmark any potential borrower against relevant UN Sustainable Development Goals. We have identified seven that match our investment themes: SDG 2 – Zero Hunger, 3 – Good Health and Well-being, 4 – Quality Education, 7 – Affordable and Clean Energy, 9 – Industry, Innovation and Infrastructure, 12 – Responsible Consumption and Production, and 13 – Climate Action, but we can invest in the other SDGs too.
We are ambitious. We look for businesses that are either market leaders in ESG or show the ambition and potential to become one. We are active in the mid-market, where, unlike at a big corporate with an established sustainability function, attention to ESG issues tends to be less institutionalised. Given this lag, there is huge scope to drive performance on ESG topics at these businesses.
Furthermore, mid-market companies make up the bulk of European markets, including the Benelux region, which is where we are initially targeting our investments. Assisting fast-growing, ambitious businesses transition to a more sustainable model has the potential to transform their sector and the wider economy and shifts sustainability into the mainstream.
And for those transactions where there is a private equity sponsor? How much influence can you have there?
In all our deals, we form partnerships with other stakeholders. When weighing up the merits of a sponsor-backed transaction, we carefully consider the GP’s ESG and sustainability approach. Fortunately, we enjoy long standing relationships with a range of private equity investors and are familiar with their ESG priorities. Should the deal move forward, we continue that conversation.
How do you work with your borrowers?
Responsible investing is integrated throughout our investment process, from screening, due diligence, deal selection, portfolio management, and on to exit. While we’re not the business owner, as an institution contributing a significant chunk of funding, we are an important stakeholder. This gives us scope to have real influence, especially when we collaborate with sponsors.
As private debt lenders, we benefit from a direct relationship with our borrowers. Our approach is hands on. Our intention is to collaborate with management teams and sponsors and lend them not just finance, although that’s clearly important, but also the benefit of our ESG expertise over the long term, as a business accelerates up its ESG trajectory. We want to grow together.
Our aim is to push our borrower’s thinking and have them stretch their ESG standards beyond what they considered before. It’s important for the success of any businesses that it responds to growing consumer demand to operate more sustainably and provide sustainable products and services. If they don’t, they’ll slip behind their competitors.
That’s not to say keeping ahead is easy. Businesses need support. Thanks to our supply chain approach – meaning we look across a sector, in the case of food, for instance, from field to fork – our client network is expansive. This means we are in a position to connect businesses so they can work together, including sharing their ESG successes and challenges.
How do you ensure your borrowers keep on track with their ESG objectives?
We keep up a continuous dialogue with them and map their progress against ESG targets and areas of improvement agreed at the start of financing and throughout the relationship. In addition, we conduct an annual ESG survey to measure progress against a tailored set of KPIs and the Principal Adverse Impact indicators (SFDR) – a sort of yearly health check. Reporting is key.
And we go further than this. During the holding period Colesco will actively engage with portfolio companies, to drive change. There is a lot to do on the sustainability front. Mid-market companies often find the fields of sustainability overwhelming. We support borrowers on their journey by e.g., measuring the carbon emissions, connecting them to peers on sustainability related topics, and sharing our knowledge of useful frameworks, tools and standards they could utilise.
Is your ESG approach more focused on risk mitigation or value creation?
We see ESG as a significant value creation driver for all stakeholders. Interestingly, businesses that pay attention to ESG risks typically make better credits. The two go hand in hand. Our scoring tool tells us that ESG frontrunners are less prone to default. This speaks to the quality of the management team. Business leaders who are aware of ESG best practice typically run their companies well overall and are better placed to weather economic adversity and other challenges. To us, it also signals ambition.
Turning the spotlight on Colesco, what commitments are you making internally to ESG and sustainability?
A commitment to sustainable investing is ingrained across the team. The highest bar we expect of our clients, is the lowest bar we expect of ourselves. We hire talented financial professionals from a range of backgrounds and nationalities, who all demonstrate strong ESG credentials and are intrinsically driven. We strive to be diverse and inclusive. No matter their role, each team member works toward explicit ESG KPIs. Although we are a small team, we have appointed a Responsible Investment Officer to drive performance internally and with our borrowers. Having an internal senior ESG resource already distinguishes from many other mid-market private debt outfits.
Our approach to ESG and responsible investing implementation is continuously evolving as we respond to ongoing advances in thinking, benchmarking, reporting and best practice. Our mission is to be a leader in the field. We’re on a journey, just like our borrowers. But we’re lucky that our legacy as a spin-out of Rabobank’s direct lending business provides us with a solid ESG foundation on which to build with our specific thematic focus.