Integration in action

NextEnergy Capital's approach to ESG integration won the solar specialist the 'Impact initiative of the year - Europe' award. Environmental Finance speaks to its head of ESG, Giulia Guidi

Environmental Finance: You closed your third institutional solar fund this year at $896 million. What's your investment approach?

Giulia Guidi: NextEnergy Capital was founded in 2007, and we focus exclusively on the solar sector. We are active in investment management, asset management and project development: investing across these three verticals provides significant synergies. We have invested around $3.3 billion across 350 solar investments.

We're a mission-driven organisation, leading the transition to clean energy. Environmental, social and governance (ESG) assessment and risk analysis form an integral part of our investment process.

EF: What does the integration of ESG mean in practice?

GG: Firstly, it means listening to the investment team, and working closely with them to understand their deals' structure and flow. Secondly, it means helping them adjust their processes to take into account additional ESG elements that might represent risk or opportunity. So, following the ESG due diligence process, that might involve preparing action plans and adding ESG clauses into the financial agreement or into the engineering, procurement and construction agreement. It also involves ensuring that ESG costs are allocated to the financial model – if you want to make things happen, you need to allocate capital.

The third aspect is ensuring that the ESG team works closely with the portfolio managers and the asset managers. Once capital has been allocated and actions included in contracts, it's about making sure managers understand what they need to deliver over the lifetime of the asset.

EF: What sort of risks can that approach expose?

GG: To give an example of a deal we were exploring in Chile: we found there was an indigenous community adjacent to the land occupied by the site. The IFC [International Finance Corporation] Performance Standards that we follow state that we need evidence that indigenous communities have given free, prior informed consent (FPIC).

We were told the FPIC had been obtained, but we were not given the evidence: the documentation setting out the process, how often communication occurred with local people, in what format what language was used and, most importantly, whether the community had been made aware of the potential impacts that could occur, during construction for example.

Eventually, after some back and forth, we found the evidence of FPIC being applied properly. We agreed to work alongside the previous owner with these communities and guarantee continuity of relationships and commitments. So it was a good outcome in the end. We now have a focal point contact in the community, providing them with a grievance mechanism, and making sure they can come to us through a local expert. As an international fund, when you're exposed to social and environmental risk, you always need to make sure you have local insight and local expertise.

EF: The fund is examining the potential for delivering positive biodiversity impact in Chile. How will that work?

GG: Biodiversity is one of the three pillars of our sustainability framework. We strongly believe that, if we manage our assets in a way that improves the natural environment, we increase their value.

Within this particular acquisition, we were required to undertake a biodiversity offset to account for the project's impact. However, we identified potential for net-positive impact, to go beyond what was required by regulation (no net loss). We have been working with our biodiversity partner and a local expert and we identified a nearby area that had similar characteristics, habitat structure, and species that was a perfect fit for the offset plan. By allocating capital and ensuring the asset manager had the capacity for implementing the biodiversity management plan, we hope to deliver the net-positive biodiversity impact.

EF: Your latest fund has been classified as EU SFDR Article 9. Was that an onerous process?

GG: Yes and no! It encouraged us to tidy up our paperwork. But it wasn't too onerous in that regard, particularly for NextPower III, because the ESG integration process was clear since the fund's inception. We had processes, procedures and policies in place, and the policy was already publicly available and signed by the Group's CEO. To have everything else written down as a document was useful to transfer that knowledge to other parts of the business.

Classification also requires you to be clear and transparent about how you contribute to one of the EU taxonomy's environmental objectives. Our business focus is to contribute to climate mitigation, and we have disclosed our carbon emissions avoided since 2019.

We also need to disclose, by June 2023, our Principal Adverse Impacts; that has been more painful because we spent time understanding what they mean for our business, whereby we do not invest in companies, but in assets. It requires disclosure of KPIs such as water or energy consumed, emissions across all three scopes, and also social KPIs such as job creation, diversity or working conditions. We're collecting these KPIs from our contractors and suppliers, including Scope 3 emissions, but, in many cases, these are small companies, with less than 50 people. It's important not to scare them! It's going to be a journey, and we have to be patient.

To summarise, we were prepared for the Article 9 process, but certain aspects are, without a doubt, onerous. Overall, however, it was a good thing to do.