3i Infrastructure | ESG

We continue to develop our focus on environmental, social and governance (‘ESG’) factors, and the responsibility of companies to their stakeholders and communities. In FY23 the Investment Manager created a dedicated ESG team with specialist sustainability resource. This has improved the rigour of our assessment of sustainability factors in our investment process and throughout the holding period, enhanced the quality of our engagement with our portfolio companies on sustainability issues, and accelerated the implementation of a range of sustainability initiatives across our investment team and portfolio.

This new team also provides the Company with updates on new regulations and emerging themes around sustainability. As owners of infrastructure businesses with majority or significant minority holdings and representation on their boards, we recognise our ability to influence our portfolio companies to ensure they act responsibly. We operate with high standards of stewardship.

We see a strong link between companies with good ESG performance and those that can achieve long-term sustainable business growth and we believe that a responsible approach to investment adds value to our portfolio. We invest selectively in a small number of businesses every year, giving consideration to the sustainability aspects of investee companies’ activities, opportunities and challenges before deploying capital. For example, the decision to invest in Future Biogas considered the UK net zero strategy, biomethane demand, and links to regenerative farming.

The Board of Directors as a whole is responsible for sustainability with day-to-day accountability resting with the Investment Manager. We are rigorous in assessing and managing sustainability-related risks in our portfolio and identifying opportunities to improve the performance of the businesses we invest in. Equally, we are keen to invest in, and actively seek, opportunities arising from the development of solutions to global sustainability challenges. These long-term trends are aligned with our strategy and investment mandate.

This matters to us as individuals, to the people managing and working within our portfolio companies and to their customers, suppliers and local communities. As investors, we depend on all of these stakeholders for our investments to be successful

We proactively engage with our portfolio to create value and the Company seeks to leverage value creation opportunities presented by sustainability considerations, and does not view sustainability in isolation from investment performance. The ESG performance of the portfolio is discussed periodically by the Investment Manager and the Board. We held a dedicated annual ESG review of the portfolio, which provided a portfolio-level view of ESG performance, emerging trends, priorities and actions.

The ESG review focused on ESG-related levers that can positively influence our ability to realise revenue opportunities and growth, cost optimisation, and value at exit. We also consider reputational and specific ESG risks for each company including health and safety, climate change and cyber security during our ownership.

We see a number of common sustainability related themes and challenges faced by our portfolio. We facilitate the sharing of best practices, innovation and solutions across our portfolio through ad-hoc connections and through workshops.

The Investment Manager has been a signatory to the UN Principles for Responsible Investment since 2011. Responsibility starts when we first consider investing in a company. We screen investment opportunities against 3i’s Responsible Investment policy. The policy sets out the type of businesses in which the Company will not invest, as well as minimum standards in relation to ESG matters which we expect new portfolio companies to either meet or commit to meeting over a reasonable time period. The Responsible Investment policy applies to all investments, irrespective of their country or sector. The Company embeds an assessment of ESG risks and opportunities at all stages of the investment, portfolio management and value creation processes. We seek to identify material ESG risks and opportunities at the point we invest, and we put in place appropriate and robust plans to mitigate the risks or capitalise on the opportunities during ownership and exit. The Board is responsible for overseeing the Company’s Sustainability strategy with day-to-day accountability resting with the Investment Manager. The Board has reviewed the Responsible Investment and other sustainability policies of the Investment Manager and is satisfied that the adoption of these policies meets the Company’s objectives in this area.

To read the Responsible Investment policy and for more information on the Investment Manager’s other sustainability policies, please refer to the 3i Group website: www.3i.com/sustainability. The policy applies to all of our investments, irrespective of their country or sector.

The Company has a long track record of investing in sustainable businesses and of working with portfolio company management teams to improve governance and operating standards and to develop growth strategies that align with long-term trends. Long-term trends such as the energy transition or climate change are considered both a risk and an opportunity for the portfolio, and are an increasingly important part of decision making for the Company.

Governance and resources - The new ESG team supported each portfolio company on its sustainability journey and consideration of the Company’s objectives at portfolio company level. The team also led the ESG reporting for the Company and delivered the annual ESG review of the portfolio.

Portfolio data collection and management - The Investment Manager improved the quality of the sustainability and GHG emissions data collected from the portfolio by refining the ESG questionnaires completed by portfolio companies. The Investment Manager selected a new software tool which will be used to gather, organise and analyse ESG data from the portfolio with better consistency. This tool will be rolled out during the next financial year.

GHG emissions - For the second year, the Investment Manager worked with our portfolio companies to measure, refine and report Scope 1 and Scope 2 GHG emissions. We made progress in the collection of Scope 3 data from the portfolio. We worked with a third-party specialist firm to review data collection governance and controls at each portfolio company and suggest areas for improvement.

Transition plans and targets - We worked with portfolio companies to consider and implement opportunities to reduce their Scope 1 and 2 GHG emissions over time, where possible developing decarbonisation plans. With support from a consultancy, we assessed the ability of portfolio companies to set near-term targets aligned with the objectives of the Paris Agreement. On 5 April 2023, the Investment Manager wrote to the SBTi to indicate its commitment to set up science-based targets. That commitment will require the Company’s portfolio companies to set SBTs over time.

Climate scenario analysis - This year, the Investment Manager carried out its initial, top-down scenario analysis to model the impact of climate change on our portfolio companies, in line with TCFD recommendations. It is currently refining and improving its approach to scenario analysis to better understand climate physical and transition risks in our portfolio.

There is a detailed Sustainability report in the latest Annual report and accounts. Sustainability is a core theme referenced throughout the report. In addition, case studies for the majority of the portfolio are available on www.3i-infrastructure.com.