Addenda Capital has launched the Eco-Social Commercial Mortgages Pooled Fund to invest in commercial mortgages on the basis of the United Nations Sustainable Development Goals.

The fund's investments can be grouped into five themes: affordable housing; green buildings; underrepresented groups; cultural, non-profit and community facilities; as well as health and education.

“We thought it would be a great combination of Addenda’s strengths, to develop an eco-social or a more sustainable, responsible investing type of product that leveraged our expertise in commercial mortgage,” said Tyler McKinna, Addenda’s vice president of commercial mortgages.

“One of the most important things in the development of this product was being very careful that we are using very credible resources for all of our definitions, for all of our structures for the themes. So that's where we were inspired (to) leverage the UN Sustainable Development Goals.”

First adopted in 2015, the UN's 17 goals include eliminating poverty and hunger, gender equality, establishing clean energy, climate action and more.

Headquartered in Montreal, Addenda is a privately-owned investment management firm that looks after pension, private wealth, insurance, corporate and foundation assets.

It also has offices in Toronto, Guelph and Regina with around 125 employees and $33 billion in assets under management. It manages $5 billion in commercial mortgages for its institutional and private wealth clients. For the eco-social fund, approximately $54 million has been set aside.

Founded in 1996, it merged with Co-operators Investment Counselling Ltd. in April 2008.

Addenda’s Eco-Social Commercial Mortgages Pooled Fund

The firm began work on the fund about 18 months ago. There are 15 Addenda employees working in commercial mortgages across several client funds.

Loans in the eco-social fund are shared due to a compliance requirement. For example, if a $15-million loan qualifies under the fund's investment criteria, the eco-social fund might commit only $2 million of the full amount.

McKinna said the framework for the fund took some time to develop, calling it a balancing act.

“We had to balance what's available in the normal course of business and originating commercial mortgages, and what types of properties and types of borrowers can actually apply and be a very legitimate addition to the alignment with the UN Sustainable Development Goals.”

There is a 20 per cent limit for loans that could fall outside of the criteria of those five themes at some point after origination. As McKinna explained, an investment may qualify at origination and then change throughout the term of the loan.

The limit was also put into place to have the ability to scale the product down the line.

Addenda will apply the same underwriting criteria it uses for its flagship commercial mortgage pooled fund.

He also stressed the themes and their frameworks came from outside sources, to establish credibility and to ward off accusations of greenwashing.

“It's affordable housing as defined by CMHC (Canada Mortgage and Housing Corporation). It's underrepresented groups as defined by the Government of Canada under the labour laws. Visible minorities, women, persons with disabilities, Indigenous peoples, things like that,” McKinna said. “For green buildings, its energy efficiency as defined by LEED or WELL building certifications, or by virtue of them having an energy audit.”

At the time of writing, Addenda had 26 loans in the fund seeded in by an existing investor. Green buildings made up the most at 30 per cent, affordable housing with 15 per cent, health and education makes up 21.8 per cent and underrepresented groups are 20 per cent of the fund.

Future of the fund

Addenda is a signatory of the Net Zero Asset Managers initiative, the United Nations' Principles for Responsible Investment and the Montréal Carbon Pledge. It is also an investor member of the Green Bond Principles.

Prior to the eco-social fund, Addenda had established the Climate Transition Funds and the Fossil Fuel Free Fund.

The former invests in public companies working toward a net-zero 2050 goal, with a carbon footprint-limited portfolio. The latter strategy excludes issuers that make more than 10 per cent of their income from extracting, producing, refining or transporting fossil fuels; providing equipment and services to companies involved in those businesses; or fossil fuel-fired electricity generation.

Addenda is in the process of originating new loans for the portfolio, though it does not currently have a large cash balance in the fund. However, McKinna said there is interest from “a lot” of potential investors, and now that the fund is publicly released, he expects it to grow quickly.

“There are goals to diversify that in different ways, different property categories or more entities, different geographies and that kind of thing,” McKinna said. “But right now, we're just at the infancy of it.”

Within the next year, he hopes the fund will be in the range of a couple of hundred million. From discussions during its creation and with focus groups, McKinna sees potential for it to eventually be a billion-dollar fund.

There is also potential to add different themes or expand on existing ones as various frameworks continue to develop.

“The more data we have . . . the better prop tech develops and is able to get energy usage data in the hands of the mom and pop building owner investor, the more data will be available to lenders, to be able to evaluate these loans that could fit into this product.”