Engagement with Borrowers

SEQI maintains an open and transparent dialogue with its key stakeholders – Shareholders, borrowers, suppliers, lenders and society – and reports periodically on its engagement activities. The Sustainability and Stakeholder Engagement Committee oversees and reviews the effectiveness of the Company’s mechanisms for stakeholder outreach. A feedback mechanism is implemented to ensure continual improvement based on stakeholder input and evolving standards.

SEQI deploys a range of engagement strategies designed to encourage and promote sustainable behaviour in the companies that it lends to. On occasion and where viable, some of our engagements may be collaborative with other stakeholders or lenders on the deal.

Loan Terms

Where appropriate and possible, loan terms can include covenants or repeated representations to ensure that the borrower complies with its stated ESG objectives and to encourage it to improve its standards over time. These could include, for example, obligations to: meet predefined targets; disclose data or enhanced reporting, such as completing our annual ESG questionnaire; or adopt, continue or enhance environmental, social or governance policies.

SEQI can also consider adopting financial terms in a loan where, for example, the interest rate might fluctuate depending upon the borrower’s performance on set KPIs or metrics such as carbon emissions.

The focus area of the covenant may be highly bespoke to the specific deal, such as laying out a predetermined business transition plan or contemplated with a view to a material risk present at that credit.

As a debt provider, loan terms are a powerful lever to drive positive impact and behaviour at our borrowing companies with tangible, real-world outcomes. While the limitations of this strategy should be recognised as we are generally unable to insert bespoke provisions into loans to public names, bonds, and highly syndicated deals especially when we are not a senior lender for example.

Sustainability questionnaire

Borrowers will also be asked to complete a detailed annual post-investment ESG questionnaire. This includes questions on the borrower’s overall ESG policies, procedures, progress and oversight, as well as requests into specific areas of E (e.g. description of the carbon-reduction initiatives), S (e.g. the complaints process) and G (e.g. the internal audit function). There are a range of quantifiable ESG metrics also covered, such as CO2 emissions, health and safety records, and Board independence.

Ongoing monitoring and direct engagement

ESG performance and credentials will be monitored regularly for each investment in the semi-annual monitoring process. The Investment Adviser will seek to maintain a direct dialogue with the management teams of the borrowers, or the sponsor where applicable, to discuss sustainability risks and performance.

SIMCo devises ESG action plans for every asset. These plans identify areas of improvement in the borrower’s ESG credentials and/or additional evidence that would be required to be able to fully assess certain indicators within the ESG scoring framework. These lists of actionable areas are then used to form the basis of the engagement with the borrower over the course of the year.

Escalation strategy

If a borrower’s ESG score or performance significantly deteriorates, SIMCo will contact the management of the borrower to determine a strategy to improve performance. If the borrower is unwilling or unable to do this, the Company may look to dispose of the loan.

Voting

Although lenders do not, as a matter of course, have voting rights in the companies that they lend to, from time to time they are required to consent to loan modifications, such as waivers of specific loan provisions. In such situations, SEQI’s policy is not to consent if the overall net effect of the requested modification would be negative for the ESG profile of the investment.