The pension fund for the UK’s Environment Agency, which is responsible for a broad range of environmental protection initiatives, is on the lookout for climate-focused debt funds. It is deploying capital from its cross-asset-class climate target allocation, which it aims to grow to 17 percent of its total portfolio by 2025.
The Environment Agency Pension Fund is an investor in Lombard Odier Investment Managers’ Sustainable Private Credit fund, which will issue senior secured debt to finance industrial decarbonisation projects and sustainable companies in the US. The fund has a $750 million hard-cap, a source familiar with the fund told affiliate title New Private Markets. Lombard Odier declined to comment on the fund size.
“Transition financing, like most operating capital, is largely going to come from debt. It’s our belief that that’s not going to come from [public or private] equity markets,” EAPF’s chief investment officer, Graham Cook, told New Private Markets. “Companies come to the market much more regularly for debt and very infrequently with new equity raisings.”
In its climate change policy published last year, EAPF announced a target to increase its investments tackling climate change to 17 percent of its portfolio – across public and private markets – by 2025.
The £4.5 billion ($5.7 billion; €5.3 billion) pension pool has struggled to find many “good-quality debt investments that are also sustainable… in either the listed or private markets” in recent years, said Cook, “although that has changed a lot over the last year”.
“We look for managers that can bring their investment skill and expertise along with the sustainability theme. Something that has been missing from many of the sustainable funds we see is a really strong underwriting background and an ability to manage debt risks. That’s really important in debt because there’s limited upside and a lot of downside if they get the underwriting wrong,” said Cook. EAPF also likes to see debt managers with “additional” strategic expertise, such as in “structuring and earning the complexity premium” or in origination skills “to make sure that we are getting very strong returns”.
“We’re looking for opportunities in financing sustainable enterprises. That might include tailor-made credit facilities, secured or asset-backed finance, such as scaling up solar and wind farms. And we’re looking for transition finance opportunities – providing the capital needed [for companies to] move to a more sustainable operating model,” said Cook. “The attraction of the Lombard Odier offering was that they have a very science-based approach to sustainability – I think their team has 20 PhDs, mostly in environmental sciences – as well as significant debt underwriting experience.”
As part of the pension’s 17 percent climate allocation, it is considering investments in various public and private asset classes around themes such as “climate solutions, biodiversity, natural capital, electrification”, said Cook. “We’ve made investments in sustainable forestry, circular economy, food and agriculture technology and digitalisation.”
EAPF has set a 2045 net-zero target for its entire portfolio. “[But] for us, it’s not just about reducing the carbon in our portfolio; it’s about making sure there’s real change across the real economy,” Cook concluded. “The heavy lifting needs to be done by industry, not by us trying to make our portfolio a bit prettier.”