DWS reveals ‘unique’ ESG framework for new infra debt fund

The fund, which is believed to be targeting about €500m, is set for a first close before the end of the year.

DWS has launched a new European infrastructure debt fund, which it says will be embedded with a “unique” ESG framework.

The Deutsche Bank affiliate declined to comment on the target of the DWS ESG Infrastructure Debt Fund, although affiliate title Infrastructure Investor understands this to be about €500 million with a hard-cap of €1 billion, while targeting a net yield of 3.5 percent. The fund is expecting a first close before the end of this year and a final close in 2022, Sundeep Vyas, head of European infrastructure debt at DWS, said.

According to a statement, DWS will be targeting 10 to 15 investments in the renewable energy, digital, energy efficiency, utilities, clean mobility and social infrastructure sectors. Vyas said this wide scope, embedded with DWS’s own ESG framework, is part of what distinguishes the new vehicle from other sector-specific funds in the market.

“It’s not a debt fund which does ESG things, it’s an ESG framework which drives the investment strategy,” he said. “We have created a very comprehensive ESG rating methodology and this is fully integrated. We think this is a unique product we have come across in the infra debt space. I know a lot of people talk about ESG and look at it in different ways but we haven’t seen things as comprehensively framed and embedded in the investment framework as this.”

Vyas compared the creation of the ESG methodology to the creation of DWS’s own credit rating methodology for debt investments it formed, based on that employed by S&P Global Ratings. He also said an external third party will be examining each investment to ensure it fits within the ESG framework.

“Most products we have seen so far were not very well framed and where there was a focus, it was on a specific subsector,” Vyas said, adding that this framework will accompany all of DWS’s European infrastructure investments going forward.

The fund will look to make 70 percent of its investments in senior debt and 30 percent in junior debt, DWS stated, although Vyas explained DWS will look to provide flexibility for those LPs who would prefer a more tailored approach.

“It is more focused on BB credit, but we are discussing within this framework when some larger investors like the framework but want BBB instead. We can do that as a sub-arm of this. The overall strategy remains the same,” he said.

DWS has been investing in infrastructure debt globally since 2014, having raised €3.1 billion and deployed €2.5 billion, as at the end of last year. Last month, the group held a final close on the Pan-European Infrastructure Fund III, which exceeded its original target of €2.5 billion, hitting its €3 billion hard-cap, as reported by affiliate title Infrastructure Investor.

DWS’ €525 million first infrastructure debt fund, which launched in 2018 and is now fully invested, attracted only European investors. Vyas said he believes EIDF will also attract Asian investors, but North American investors won’t be interested.

“Infrastructure debt becomes very regional,” explained Vyas. “Unless you have a global strategy, US investors will not look at it. If you have a Europe-focused strategy, you will typically only have European and maybe Asian investors.”

DWS’s first IDF made one fossil fuel-related investment into a midstream oil pipeline, but 70 percent of the fund was invested in renewable and digital infrastructure, said Vyas. EIDF will exclude fossil fuel-related investments.

Several private debt managers tie loan costs to ESG or impact performance, but DWS has no plans to join this trend. Said Vyas: “We are looking for borrowers that have well-structured frameworks for ESG. That itself will be the incentive: if they do not meet these criteria, we will not be able to invest with them.”

Snehal Shah contributed to this report.