ESG Policy

Policy as at:
06/07/2023

Real Estate Credit Investments Limited ("the Company") Environmental, Social and Corporate Governance ("ESG") Strategy

The Company is an investment company and has a management contract with the Investment Manager. It has no employees and all its Directors are non-executive, with day-to-day activities being carried out by third parties. While the Company seeks to consider all aspects of ESG, climate change is not something that is directly impacted by the activity of the Company.

In carrying out its activities, the Company aims to conduct itself responsibly, ethically and fairly. The Directors recognise the importance of environmental, social and governance factors, including climate change, when pursuing the Company’s Investment Objective and in the selection of the service providers and advisers the Company works with. The Board is alive to the magnitude of the evolving ESG landscape. It has determined that ESG considerations, and their communication, must be fundamental to all its operations and has consequently nominated an ESG lead to co-ordinate and drive internal discussion. The Board, in conjunction with the Investment Manager, continues to closely monitor upcoming regulation and any developments in this area.

The Board believes that all companies have a duty to consider their impact on the community and the environment. The majority of Directors and some of the Company’s service providers are based in Guernsey, thus minimising the need for commutes or flights to and from Board meetings. In addition, the use of technology is widely adopted to facilitate virtual conference meetings, further reducing the need for travel, whilst the use of board portals removes paper requirements for the Directors when attending Board meetings. Within the normal course of business, the Company expects there will be some air travel. Indeed, the Company considers that it is important for good corporate governance that the Board meets in person on a regular basis, and at least quarterly, with the Investment Manager present.

Additionally, the Company has decided to purchase carbon offsets for all flights that may be required by the Directors and the Investment Manager, thereby facilitating a carbon neutral position, as pertains to travel. The Company recognises that this action is part of an evolving climate strategy, that should encompass carbon removal as well as carbon offsets.

Further efforts to reduce its carbon footprint, constitute electronic only communications to all shareholders on the share register. Accordingly, the Company’s website is now the default method of communication for shareholder publications. Currently approximately 89% of the Company’s shareholders receive documents and other communications electronically.

The Company’s service providers and advisers recognise the importance of strong corporate governance with a culture based on integrity, respect and diversity and have adopted ESG standards. Further, they have documented and implemented policies on day-to-day functioning and supporting initiatives to minimise the environmental impact they have on the climate, where possible or relevant. Details of the ESG and corporate responsibility of the Company’s service providers are available on their websites, where possible or relevant, or may be available upon request.

The Company’s main activities are carried out by Cheyne, the Investment Manager, and as such the Company adopts the Investment Manager’s policy and approach to sustainability and integrating ESG principles.

The Investment Manager was one of the initial signatories to the Standards Board for Alternative Investments (formerly known as the Hedge Fund Standards Board) and is a signatory to the United Nations-supported Principles for Responsible Investment (“PRI”). In its most recent assessment, Cheyne scored 4 stars out of 5 in all modules bar one. Cheyne received a score of 68% (4 stars out of 5) in the Investment and Stewardship Policy module (where the PRI median was 62%). Over 40% of its sub-indicators in this module received a perfect score.

The Investment Manager’s ESG Implementation Forum oversees both the Responsible Investment and ESG policies to ensure that it continuously improves its ESG standards. Its Responsible Investment policy is already incorporated into its investment process.

The Investment Manager has now engaged an external Real Estate ESG specialist consultant to assist with developing and provide assurance on a comprehensive scorecard-based approach using a borrower questionnaire for each deal.

The Investment Manager will specify that a minimum 50% of the portfolio will comprise Qualifying Investments (based on investment commitments at each calendar year end). In practice, the Investment Manager expects the portfolio average scores to be higher.

The ultimate aim is to align the Investment Manager’s principles with industry recognised benchmark standards to identify a minimum ESG standard needed across RECI’s portfolio. The move to a more qualitative system will significantly help the Investment Manager identify and understand ESG based risks in its portfolio more easily, and not only assist with lowering risk and increasing quality, but will also help collate and measure the data required to track progress in what is a fast moving but increasing important area of focus. The Investment Manager is currently in the implementation phase of the project, which will include training for the Real Estate team and the wider employee base.

Incorporating Sustainability into the Investment Process

Due Diligence

RECI is primarily invested in real estate loans and other real estate-based debt investments. Key factors taken into consideration, where appropriate and possible, are best-in-class environmental, design and construction standards, a focus on Building Research Establishment Environmental Assessment Methodology “BREEAM” ratings, governance rights and engagement with sponsors. Sustainability risks are considered during the Investment Manager’s initial due diligence in respect of an investment opportunity, including as part of the external valuations of the real estate being financed (such valuations typically consider any environmental and/or social risks) and early engagement with potential borrowers or issuers through a data gathering exercise.

The Investment Manager’s analysts also compile reports using data gathered from their own due diligence and external reports, environmental performance indicators (including BREEAM ratings and Energy Performance Certificates) and investigations (including through the use of forensic accountants and other third-party consultants). This information is included in the investment committee memorandum, which is considered by the Investment Manager’s investment committee prior to an investment being made.

Decision-Making Process

Sustainability risks are considered as part of the investment decision-making process for RECI. In particular, the following sustainability risks are typically considered, both in respect of the real estate being financed and/or the relevant borrower or issuer:

  • Environmental: power generation (including its sustainability), construction standards, water capture, energy efficiency, land use and ecology and pollution.
  • Social: affordable housing provisions, community interaction and health and safety conditions.
  • Governance: management experience and knowledge and anti-money laundering, corruption, and bribery practice.

Ongoing Management

Sustainability risks also form part of the ongoing monitoring of RECI’s investments, with regular reports and ongoing engagement from borrowers and issuers incorporating information related to sustainability risks provided to the Investment Manager. Where appropriate, the investment team will assist borrowers and issuers in addressing ESG-related issues and support its borrowers’ and issuers’ efforts to report externally and internally on their ESG approach and performance in relation to material sustainability risks.

Exit

ESG considerations are already having an impact on underlying real estate values and whilst clear data driven evidence is in its infancy, the Investment Manager is acutely aware that during the life of the loans that RECI is writing, this will become much clearer. As such this is an important consideration regarding risk analysis now, hence the approach above is an integral tool when calculating, managing and measuring risk.

Responsible Investment Highlights 2023

An example of the Investment Manager’s approach is the recent investment into a loan secured by a Senior Living Development project:

Riverstone Kensington, Senior Living Development, UK (“Riverstone”)

Environmental

  • There are a number of initiatives to promote energy efficiency including motion sensor lighting and operating electric vehicles/providing EV charging points. Targeted BREEAM Excellent rating.

Social

  • The property is looking to address a shortage of assisted-living retirement units in London for residents who are +65 years old and want to remain within central London.

Governance

  • Riverstone is governed by an experienced team and Board which has put in place policies to ensure the health and safety of its residents’ wellbeing are at the core of its agenda.
  • The building has been built to the highest regulations and will adhere to the highest standards of care, providing an ergonomic and age-appropriate design to reduce the risk of accidents and facilitate independence for longer.

Further details on Cheyne’s ESG policy can be found on their website. https://www.cheynecapital.com/esg-responsible-investment