CASE STUDY

ESG/Impact Maritime Leasing

UK Endowment Fund | 2021

Engagement at a glance

Client Country/Type: UK Endowment Fund
Year: 2021
Asset Class: Maritime Leasing and Financing
Mandate Size: USD50 million
Mandate Geography: Global
Investment objective: 12%-plus net IRR, strong ESG standards
Mandate Type: Pooled funds
bfinance Services: Manager Selection

Impact Maritime Leasing

Client-specific concerns

The client, a UK endowment fund with strong environmental, social and governance (ESG) credentials, was looking to further diversify its existing infrastructure programme. The endowment’s investment team had identified maritime leasing as a potentially attractive new asset class subsector and wanted to find an investment solution that combined strong and stable returns with solid ESG performance. More specifically, this client preferred strategies that would go beyond straightforward mitigation of ESG-related risks to deliver genuinely positive environmental outcomes as well as net annual returns of at least 12%. The fund initially planned to allocate USD30 million to the new mandate but—based on the opportunities available in the sector—increased the total to USD50 million upon completion of the search.

Outcome

  • Exploring methods of ESG implementation: bfinance provided broad coverage of the manager universe, targeting impact funds and also exploring conventional funds that presented robust ESG frameworks—in this way, the team was able to explore a range of options across the risk-return spectrum to inform the relative value discussion.

  • Assessing managers’ risk-mitigation tactics: in preparing the client to make an informed decision, bfinance assessed the robustness of various approaches to mitigating the sector’s key ESG risks, including creating pollution, transporting unethical products, engaging in hazardous shipbreaking, sailing under flags of convenience, etc. The team also scrutinised the managers’ approaches to enhancing fuel efficiency in shipping vessels, notably the extent to which ships acquired by their funds would have flexible engine systems that could make use of lower-carbon fuels today—and potentially zero-carbon fuels in the future (with retrofits).

  • Supporting client due diligence: bfinance provided additional support throughout the client’s investment approval process and prepared a due diligence report on the client’s preferred finalist; the report probed the extent to which the manager actively factored ESG considerations into its investment management decisions, such as its commitment to minimising the exposure to the transportation of thermal coal.

Our specialist says

  • The maritime sector’s ESG standards have evolved over the past few years. Shipping vessels are already the most fuel-efficient form of transportation for global trade, and both regulatory and technological drivers will continue to improve environmental performance over time. Shipping is a cyclical industry, but a diversified portfolio of vessel types stands to benefit from the low correlations between the various maritime sub-sectors, such as dry bulk vessels and container ships. When structured adequately, leasing transactions offer attractive yet stable cash flows. By exploring the full range of maritime strategies, our client was able to identify an optimal risk-return proposition and commit to a manager with a clear roadmap to carbon neutrality.

}