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Responsible Investment 2021
February 2021 • privateequityinternational.com
30
big ideas
shaping ESG
We are Delivering
Superior Outcomes Through a
Commitment to ESG
Diversity and Inclusion
78%
of our Employees
49%
of our Managers
40%
of our portfolio companies
are Women are Women have Women/Minority
CEO/COOs
Nippon Sangyo Suishin Kiko
Atago Green Hills MORI Tower 17F, 2-5-1 Atago, Minato-ku Tokyo
TEL: 03-5401-5600 FAX: 03-5401-5620 www.nsskjapan.com
ESG Performance Data is from NSSK Fund II portfolio as of January 2021.
Insight
Editor’s letter
New York
130 West 42nd Street
Suite 450
Investors stand firm
on ESG
New York
NY 10036
T: +1 212 633 1919
London
100 Wood Street
London
EC2V 7AN
T: +44 20 7566 5444
Hong Kong
Louise Fordham
19F On Hing Building louise.f@peimedia.com
1 On Hing Terrace Central
Hong Kong
T: +852 2153 3240
Private Equity International
O
Published 10 times a year by ver the last year, limited partners have adapted to virtual meetings with
PEI Media. To find out more about
PEI Media visit thisisPEI.com
general partners, conducted fund due diligence remotely and even
committed to new managers without meeting in person. Yet there is
© PEI Media 2021
one issue the majority of investors were unwilling to provide flexibility on in the
No statement in this magazine is to wake of covid-19: their commitment to environmental, social and governance
be construed as a recommendation
to buy or sell securities. Neither
issues. According to Private Equity International’s LP Perspectives 2021 Study, only
this publication nor any part of it 12 percent of LP respondents were open to relaxing their ESG policies as they
may be reproduced or transmitted
in any form or by any means,
relate to private markets fund investments in light of the pandemic.
electronic or mechanical, including Rather than stymying ESG
photocopying, recording, or
initiatives, covid-19 and the
by any information storage or
retrieval system, without the prior tumultuous events of 2020 galvanised “ Rather than
permission of the publisher.
Whilst every effort has been
many industry stakeholders to act, or stymying ESG
made to ensure its accuracy, the at least reassess their approaches to
publisher and contributors accept
responsible investment and ESG risks. initiatives… the
no responsibility for the accuracy
of the content in this magazine.
Readers should also be aware
Examples of this can be found in PEI’s tumultuous events
inaugural 30 Big Ideas Shaping ESG list
that external contributors may
represent firms that may have – such as Vital Capital’s Impact Relief of 2020 galvanised
an interest in companies and/or
their securities mentioned in their
Facility, an emergency debt facility to many industry
help businesses in sub-Saharan Africa
contributions herein.
weather the pandemic; or Partners stakeholders to act ”
Cancellation policy You can
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Fund, established to help portfolio company employees affected by the virus
receive a refund of 70 percent and which included contributions from the firm’s staff, co-CEOs, chairman and
of the total annual subscription
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available. Any cancellation request Of course, there were examples of innovation in this space long before
needs to be sent in writing to
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(subscriptionenquiries@peimedia. ‘big ideas’ in ESG and impact investing, and read a cross-section of industry
com) in either our London or
New York offices.
perspectives on the future direction of travel for responsible investment in
private equity.
Printed by Stephens & George Ltd
stephensandgeorge.co.uk
Louise Fordham
February 2021 • Responsible Investment 1
Responsible Investment 2021
ISSN 1474–8800 • FEBRUARY 2021
The ESG themes picking up steam A customer-centric approach More than a glossy brochure
The last 12 months have shone a to ESG Responsible investment must be
new light on what it means to be a Helping companies chart a path to defined and quantifiable, say 3i
responsible investor 4 sustainable growth built on strong private equity director Rupert
ESG principles is a crucial value driver Howard and infrastructure partner
Think big and be bold on ESG
for private equity, say CVC’s Jean- Tim Short 66
Private equity must set itself
Rémy Roussel and Chloë Sanders 29
ambitious targets if it is to move Getting ready for SFDR
the needle in areas such as gender New tone on climate change New EU rules bring ESG disclosure
equality, says NSSK’s Jun Tsusaka 8 Joe Biden’s environmental agenda requirements for fund managers 68
could provide added impetus for
Pipe dream: ESG data in ‘real-time’ Collaborate and listen
ESG strategies in private markets 32
The technology and expertise exist Sharing best practice between
to communicate non-financial KPIs to Investing in sustainability along investee businesses is the optimal
LPs with regularity, but don’t expect it the food chain way to embed ESG across a large
to happen any time soon 10 Developing sustainable solutions to and diverse portfolio, say Cinven’s
food production is an environmental Vanessa Maydon and Matthew
ESG: The beginning of the end and social imperative. It also makes Sabben-Clare 71
Although engagement remains good business sense, says Paine
patchy in some regions, Aberdeen The ESG talent pool
Schwartz Partners CEO Kevin
Standard Investments’ Alistair Responsible investment-related roles
Schwartz 34
Watson, Alan Gauld and Stephanie are proliferating in PE 74
Kempton expect ESG integration to Human capital is central to ESG
Beyond the checklist
soon become the industry norm 13 The pandemic has propelled
A proactive approach to
human capital to the forefront of
Climate: What investors want environmental, social and
the conversation on ESG priorities
Investors are starting to ask more governance factors can identify
moving forward, says Partners
of their managers when it comes to risks that static datasets may miss,
Group’s Carmela Mondino 43
climate strategy 16 says RepRisk’s Alexandra Mihailescu
Finding value through an ESG lens Cichon 76
Opening up access to PE Being systematic on the ‘S’ in ESG
LPs have a vital role to play in driving Setting the tone on ESG
will help firms identify opportunities
meaningful progress on diversity A thoughtful and up-to-date
and build resilience, says Blue Wolf
and inclusion in the industry, say environmental, social and
Capital’s Adam Blumenthal 49
governance policy is a critical part
HarbourVest’s Craig Fowler, Amanda
PE’s opportunity to lead of the bedrock of responsible
Outerbridge and Sanjiv Shah 18
global change investment, says Northleaf Capital
Generational shift KPMG’s Tania Carnegie argues the Partners’ Jeff Pentland 80
Are a new generation of leaders opportunity for private equity is
poised to revolutionise PE’s approach significant, particularly when players
to responsible investment? 21 collaborate 56
Calculating climate risk A step change in ESG data
Understanding business and As regulatory regimes tighten,
sector-specific exposure to climate managers need to think carefully
change can help identify risks and about their ESG strategies and how
opportunities in the transition to a technology and data can help, say
low carbon economy, says Permira’s
Adinah Shackleton 24
IHS Markit’s Kevin Bourne and
Rishi Kotecha 61
74
2 Private Equity International • February 2021
Contents
How to contact us
Innovators in ESG and impact investing
37 Senior Editor, Private Equity, Americas
Isobel Markham
PEI highlights where private equity is bringing fresh thinking to the isobel.m@peimedia.com, +1 646 380 6194
environmental, social and governance challenges facing the world Senior Editor, Private Equity, EMEA
Adam Le
adam.l@peimedia.com, +44 20 7566 5437
COVER STORY West Coast Bureau Chief
30 big ideas shaping ESG 38 Lawrence Aragon
laragon@buyoutsinsider.com, +1 415 469 1183
Finance 40 Senior Special Projects Editor
Graeme Kerr
Measurement 41 graeme.k@peimedia.com, +44 20 3862 7491
Diversity 46 Special Projects Editor
Louise Fordham
Due diligence 47 louise.f@peimedia.com, +44 20 7566 5440
Senior Reporters
Social responsibility 48 Rod James
rod.j@peimedia.com, +44 20 7566 5453
Environment 52 Carmela Mendoza
carmela.m@peimedia.com, +44 20 3640 7512
Governance 54
Senior Reporter – Asia
Technology 55 Alex Lynn
alex.l@peimedia.com, +852 3704 4638
The ESG influencers in secondaries 59 Contributors
Amy Carroll, Claire Coe Smith, Ben Jackson,
Vicky Meek, Toby Mitchenall, Eamon Murphy,
Impact in action Victoria Robson
Six case studies that show the potential of impact investing 64 Managing Editor, Production: Mike Simlett
Production Manager: David Sharman
Production Editors: Daniel Blackburn,
Adam Koppeser
Copy Editors: Eric Fish, Nicholas Manderson
Q&A Data Art Director: Mike Scorer
Head of Design: Miriam Vysna
Senior Designer: Lee Southey
‘Our approach evolves as ESG pressure is mounting Designers: Denise Berjak, Pio Blanco
more data become available’ Investors are uncompromising Head of Marketing Solutions,
Close partnerships with in their focus on ESG in the Private Equity Group:
Alistair Robinson
management are key to more face of covid-19, according alistair.r@peimedia.com, +44 20 7566 5454
sustainable business practices, to studies from PEI, sister title Subscriptions and Reprints
Private Funds CFO, Intertrust subscriptions@peimedia.com
says Katharine Preston of
and PitchBook 78 Customer Services
OMERS 27 customerservices@peimedia.com
Editorial Director, US: Rich Melville
‘It is likely that markets have Editorial Director: Philip Borel
failed to value adequately Director, Product: Amanda Janis
the potential risks coal
mining companies face’
Guest comment Director of Research and Analytics: Dan Gunner
Managing Director, Americas: Colm Gilmore
USS Investment Management’s Managing Director, Asia: Chris Petersen
David Russell on why the UK’s Chief Commercial Officer: Paul McLean
A new string in fund
Chief Executive Officer: Tim McLoughlin
largest private pension is finance’s bow
divesting from some sectors 28 Private equity sponsors are
driving ESG developments
‘An impact vehicle has a very in fund finance, and other
strong market to play in’ asset classes are following
Opportunities beckon for suit. Debevoise & Plimpton’s For subscription information visit
privateequityinternational.com
private debt investors looking Thomas Smith and Felix
for impact in Africa, says Total Paterson discuss ESG-linked
Impact Capital’s John Simon 84 sub lines 83
February 2021 • Responsible Investment 3
Insight
Key trends The past 12 months have shone a new light
on what it means to be a responsible investor. Here are
the ESG themes set to pick up steam in 2021
LPs pump up the into investment and ownership
pressure “ We can expect decisions, increasing the PRI’s
From the social significant signatory base to over 3,300 firms
and economic worldwide.
fallout of covid-19, developments In line with this, ESG is taking
to the inequalities on greater weight in limited
highlighted by the and innovation in partners’ due diligence processes
Black Lives Matter technology ” – 88 percent take a manager’s
movement and consideration of ESG factors into
Paul Davies
the devastation Latham & Watkins
account when conducting due
caused by wildfires diligence, according to Private
in Australia and the Equity International’s LP Perspectives
US, 2020 laid bare the pressing need 2021 Study, up from 81 percent
for action around environmental, the previous year. Meanwhile, sister
social and governance issues, writes title Private Funds CFO’s recent
12%
Louise Fordham. Insights Survey, found that almost
Already on an upward trajectory, three-quarters of LPs either always or
ESG has taken an even stronger sometimes ask whether funds have
foothold in the private equity Percentage of LPs that do not an ESG consultant in place to advise
industry over the past year as firms consider ESG during due diligence on responsible investing across their
took steps to mitigate the immediate portfolios.
37%
effects of the coronavirus pandemic Julia Wikmark, sustainability
and paid increasing attention manager at global private markets
to how climate risks may impact firm EQT, tells PEI that demand for
portfolios moving forward. In Q3 Percentage of LPs that somewhat
climate-related information is on the
2020 alone, 262 firms – including agree GPs are taking climate change rise. “The level of detail and number
43 asset owners – signed up to risks seriously enough of questions has rapidly increased
the UN Principles for Responsible over the past two years, both in
Investment, which encourages Source: Private Equity International’s LP
terms of EQT’s own operations and
investors to incorporate ESG factors Perspectives 2021 Study portfolio performance,” she says.
4 Private Equity International • February 2021
Insight
And while questions on climate Collaborations chief executive Deanne Stewart said:
risks ramp up, the latest LP flourish “To really shift the dial and achieve
Perspectives Study suggests not all The statement lasting action to halt the potentially
investors believe general partners by CalSTRS, devastating impacts of climate
are paying enough heed to climate GPIF and USS change, it is critical businesses,
change. Forty-one percent of is just one investors and governments alike
respondents either somewhat or example of set and deliver on transparent,
strongly agree GPs are taking climate how industry meaningful and measurable
risks seriously enough in their own players are targets and goals. We can do this
investment policies and practices, working individually but collaboratively we
yet 22 percent either disagree or together to address climate risk. have the power to do so much
strongly disagree and a further 37 In October, a new private sector- more.”
percent remain ambivalent. focused initiative backed by 16 The following month, Ardian,
It has been almost a year since institutional investors launched The Carlyle Group, Macquarie
three of the asset class’s biggest to support emissions reduction Infrastructure and Real Assets,
LPs – the California State Teachers’ in Australia – Climate League Global Infrastructure Partners and
Retirement System, the UK’s USS 2030. Supporters, which include SoftBank Investment Advisers
Investment Management and superannuation funds such as Aware formed the One Planet Private
Japan’s Government Pension Super and Cbus, will be asked to Equity Funds initiative. Their goal
Investment Fund – issued a joint pledge at least one new action a is to “advance the understanding
statement calling for a greater year to help drive down greenhouse of climate-related risks and
focus on long-term sustainability- gas emissions under three themes: opportunities within our investment
related risks, rather than short-term the integration of Paris-aligned portfolios so that we can build better
returns at the potential expense emissions reduction goals into and more sustainable businesses”.
of other stakeholders “including investment policies or business The six founding members
the environment, workers and strategies; collaboration between will engage with members of
communities”. The statement investors, clients and companies to the previously established One
warned: “Asset managers that deliver emission reductions; and Planet Sovereign Wealth Funds
only focus on short-term, explicitly investment in new clean energy, and One Planet Asset Managers
financial measures, and ignore clean technology and other projects and collaborate on the One Planet
longer-term sustainability-related and measures that reduce Australian Sovereign Wealth Fund Framework.
risks and opportunities are not emissions. This framework sets out three
attractive partners for us.” In a statement announcing Climate principles – alignment, ownership
USS Investment Management’s League 2030’s launch, Aware Super and integration – “to accelerate
head of responsible investment, the integration of climate change
David Russell, tells PEI that an analysis into the management of
additional 12 global funds have large, long-term and diversified
joined as co-signatories to the asset pools”.
‘partnership for sustainable capital Two heads, as they say, are
markets’ statement since its release better than one, and given the
in March 2020. Russell says: “It is scale of the climate challenge it
for each signatory to decide how to
respond to address the challenges
“ We can do this makes sense for stakeholders
from within the private equity
and opportunities highlighted in the individually but industry and beyond to work
statement. For our part, we hope together. It is hoped that by sharing
that the support for the statement
collaboratively we key learnings, expertise and best
will send a strong signal to the have the power to practices across responsible
market that asset owners now see investing themes and through
long-term sustainability risks as a do so much more ” initiatives such as those outlined
core component of investment and Deanne Stewart above, more progress can be
stewardship processes.” Aware Super achieved at a faster pace.
February 2021 • Responsible Investment 5
Insight
A greater latest members of London-based Disclosure
focus on organisation Black Women in Asset demands
diversity Management. increase
Another area It seems investors have begun to A pressing
where the take greater note of the role they issue for
industry is can play in making progress on managers
increasingly diversity and inclusion. In late 2020, is the EU
coming ILPA managing director of industry Sustainable
together is affairs Jennifer Choi told PEI that Finance
diversity and LPs had started taking a more Disclosure
inclusion. In direct approach to D&I. Regulation,
December, the Institutional Limited “The focus for our members taking effect in March. SFDR requires
Partners Association announced the seems to be around transparency managers doing business in the
Diversity in Action initiative for GPs and ensuring they have access to EU to disclose how sustainability
and LPs, which requires signatories information they deem important to risks are integrated into investment
to meet four core diversity, equality their organisation, such as specific decisions and ensure remuneration
and inclusion criteria and at least two metrics on gender and ethnicity at policies are consistent with the
optional DEI criteria. the manager, and how recruitment integration of sustainability
Signatories must: have in and retention efforts support risks. While the UK will not be
place a DEI statement or strategy broader D&I goals,” said Choi. implementing SFDR, it plans to
communicated publicly, or a “Members have shared that there develop its own disclosure regime.
DEI policy communicated to is an expectation GPs will improve Paul Davies, partner and co-chair
employees and investment partners, their D&I efforts over time, with the of the ESG taskforce at Latham
that addresses recruitment and understanding that, at the time of & Watkins, says: “International
retention; track internal hiring and investment, diversity metrics may fall private equity houses may
promotion statistics by gender short or D&I practices may be more find themselves subject to EU
and race/ethnicity; have in place nascent.” regulatory requirements and/or
organisational goals that result in And as LPs probe GPs further, other regulatory developments
demonstrable practices to make emerging managers are seeking to concerning ESG disclosure,
recruitment and retention more build in diversity from the outset, including those that emerge in the
inclusive; request (if an LP) or provide Gabrielle Joseph, head of due UK. As such, the ability to obtain
(if a GP) DEI demographic data diligence and client development at the necessary information and data
for any new commitments or new Rede Partners, tells PEI. from portfolio companies will be an
fundraises. Examples of optional As Guy Townsend, joint chief important consideration.
criteria include assigning senior-level executive at Walker Hamill, notes: “We can expect significant
DEI accountability and providing “LPs may be forgiving of a firm developments and innovation in
unconscious bias training for staff. that has been around for decades technology, as the ESG data lake
Diversity in Action comes on and needs time to adjust, but they grows and resources are needed
the heels of ILPA’s Diversity and are not going to support a brand to enable a quick, simple and
Inclusion Roadmap, which launched new manager with a line-up of 10 cost-effective means to analyse
in February last year to provide middle-aged, white males.” ESG performance and benchmark
LPs and GPs with access to online performance against peer
resources and best practices. companies.”
Some private equity firms are also Data standardisation has been
taking steps to support initiatives “ There is an particularly challenging, yet GPs
dedicated to advancing groups appear relatively optimistic progress
that are particularly under-
expectation GPs will is being made. Three-quarters of
represented in the investment improve their D&I fund managers in Intertrust’s Global
industry, such as black women. Last Private Equity Outlook 2020 report
month, for example, Blackstone, efforts over time ” expect ESG data across portfolio
KKR, Clayton Dubilier & Rice Jennifer Choi companies to be fully standardised
and Livingbridge became the ILPA within five years. n
6 Private Equity International • February 2021
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Analysis
K E Y N O T E I N T E R V I E W
Think big and be bold
on ESG
Private equity must set itself ambitious targets if it is to move the needle in
areas such as gender equality, says Jun Tsusaka, founding partner at Japan’s NSSK
Q Why is responsible
investment so important
to NSSK and how has that
SPONSOR
NSSK
well at all. Of course, if nothing is done
about that, the situation will only dete-
riorate. It was important for us to set
manifested itself in the firm’s big and bold objectives in this area, be-
structure and approach? just as much as we are focused on cause without that you simply will not
Our firm is relatively young. NSSK generating superior financial returns. move the needle.
was established just over five years NSSK was created with that big and We are proud of the success we have
ago, when the pursuit of responsible bold ambition. already been able to achieve. NSSK
investment was in the ascendancy. In now has a portfolio of 17 different com-
many ways, it was a question of being
in the right place at the right time.
We launched NSSK with the express
Q NSSK has placed a heavy
focus on diversity and
inclusion in its ESG goals. What
panies with over 9,000 employees, and
around 80 percent of those employees
are women. Meanwhile, 49 percent
purpose of helping to revitalise Japan is the driver behind that? of management positions are held by
through private equity and we incor- Of the 153 countries included in the women and 40 percent of our CEOs
porated environmental, social and World Economic Forum’s latest Global and COOs are either women or people
governance principles into our mission Gender Gap Report, which looks at eco- from minority backgrounds. Those are
statement from the outset. We are fo- nomic, educational, health and political startling numbers when compared to
cused on generating superior outcomes disparities between the sexes, Japan is the Japanese benchmark. In fact, we do
for society and for the environment, ranked at number 121. We do not fare not use Japan as a benchmark because
8 Private Equity International • February 2021Analysis
the numbers are simply too low. We and to offer advice on how to make im-
look to regions such as the Nordics for
“It is vital that these provements. Finally, I chair the ESG
best practice and set our targets against committee. That is because we believe
what we see happening there. things start from it is vital that these things start from the
top. ESG is not something to be dele-
Q What is holding private
markets back when it
the top. ESG is not
something to be
gated.
comes to gender equality?
There is a lingering sense that prioritis-
ing responsible investment targets can delegated”
Q Employee wellbeing is
crucial to your approach.
How do you measure that and
negatively impact returns. There is still why do you believe happiness
a feeling that there is a trade-off there is so important in a business
somewhere, and yet there have been context?
numerous studies showing precisely There was a time when ESG initiatives
the opposite. Certainly, our funds gen- were hampered by a lack of data. Now
erate top-quartile performance whilst we have the data but are finding that
also exhibiting year-on-year improve- those numbers do not necessarily tell
ments in terms of the gender gap. Peo- the full story. We employ something
ple are economically rational animals, called the Happiness Index to fill that
so once they fully buy into the fact that gap. Fundamentally, we believe that
responsible investment is positively you must have happy employees to
correlated with returns, that will go a create customer satisfaction. We are
long way towards helping the cause. convinced there is a direct correlation
between happiness and performance.
Q NSSK raised an impact
vehicle at the same time
as its first institutional private
Part of the philosophy officer’s job is to
ensure that happiness is top priority in
our portfolio companies.
equity fund. Why did you We have identified three variables
decide to make that move? that we believe are critical to success,
It is consistent with our overall mis- both in business but also in life. The
sion. We worked with private investors our aims and help turn them into re- first is hard work. The second is abil-
and government-related entities to es- ality. Part of that has involved the ap- ity – because we know that with hard
tablish our first impact fund in 2017, pointment of a chief philosophy officer. work ability levels can be raised. The
which was one of the first impact funds Some of the companies we back third variable can be directly translated
in Japan at that time. Today, we are in have had their mission statements in from the Japanese as ‘way of thinking’.
the process of raising four additional place for 100 years. You would be hard We see the success formula for life as
impact funds, each focused on commu- pressed to find any corporate mission a mathematical equation – hard work,
nity engagement, employment growth, statement from 100 years ago that in- multiplied by ability, multiplied by way
improving social outcomes and gender cluded ESG principles. Our chief phi- of thinking. Even if the first two are
diversity, which will mean we manage losophy officer helps businesses think at 100 percent, a way of thinking that
five out of the 10 impact funds that cur- about their attitudes, behaviours and is even slightly negative will produce
rently exist in Japan. codes of conduct – what it means to an overall negative result, which just
be a responsible corporate citizen and shows the importance of having a posi-
Q What is your strategy for
resourcing responsible
investment?
to be responsible members of soci-
ety – and to distil that into a mission
statement fit for the modern world. We
tive frame of mind.
Of course, we want our portfolio
companies to have the latest technol-
Responsible investment is the respon- then start by educating small groups, ogy – the very best in hardware and
sibility of every individual in our firm, who pass the message on. It becomes, software. But equally, we place great
and once we have invested in a com- in many ways, a missionary activity. importance on what we call ‘heartware’
pany, it becomes the responsibility of We also have a full-time ESG au- – being sympathetic, kind and respect-
every employee in that business as well. ditor whose job it is to look at NSSK ful. We believe these attributes can go
But it was also important to us to set and its portfolio companies to ensure a long way towards making a company
up an infrastructure that could support we are doing what we say we are doing, better. n
February 2021 • Responsible Investment 9Analysis
The pipe dream:
ESG data in ‘real time’
The technology and expertise exist to communicate non-financial KPIs to LPs with
regularity, but don’t expect it to happen any time soon. Toby Mitchenall reports
H
ow many jobs did your The head of private capital for a With its historical connection to de-
private equity portfo- large European private bank tells PEI velopment finance, private fund man-
lio create this month? that the organisation has not yet created ager Actis is progressive when it comes
How much closer is it an ESG due diligence questionnaire for to integrating and reporting ESG. As
to net-zero emissions? its private markets managers. The exec- part of its quarterly reporting, the firm
Right now, private eq- utive adds that the bank is in the process includes asset-by-asset responsible in-
uity investors cannot easily answer such of adapting an established ESG scoring vesting reports, which sit alongside the
questions. system for traditional liquid funds to its businesses’ operational updates, finan-
The environmental, social and PE programme. cial metrics and team news. This has
governance information that limit- According to our LP Perspectives been part of the firm’s standard report-
ed partners currently receive tends 2021 Study, these examples are repre- ing for around a decade, says Daniel
to be gathered at the point of due sentative. For 50 percent of investors, Price, a principal in the EMEA inves-
diligence – via an ESG-focused due ESG forms only a minor part of due tor coverage team, but “the detail has
diligence questionnaire – and some- diligence, while for 12 percent it is not increased over the last couple of years”.
times appended through periodic (of- covered at all. Thirty-eight percent of James Magor is a director in Actis’s
ten annual) questioning of general LPs say it forms a major part of due four-strong responsible investment
partners. diligence. Two other investors PEI has team. “We see ESG and responsible in-
“In our ESG due diligence we are spoken to – a consultant in the US and a vestment as being fully integrated into
still ‘nice guys’,” a senior private equity state-owned investor in Scandinavia – our investment approach, so our house
investor at one Scandinavian pension gather ESG data at the due diligence view is that our reporting to our LPs
tells Private Equity International. It is a stage and subsequently through recur- should reflect that,” he tells PEI.
reference to the fact that even manag- ring annual surveys of all their partners. Magor points out that Actis has start-
ers that come out with the lowest pos- All the investors note that ‘best ed including sustainability highlights
sible score from their ESG assessment practice’ in reporting ESG data to at the front end of quarterly reports
process could still win themselves a LPs is being formulated and driven by alongside the executive summary of the
commitment. forward-looking GPs. fund performance. “It is a standalone
10 Private Equity International • February 2021Analysis
section, which includes things like, for incomparable assets in different sectors
example, the CO2 offsets for our in- and geographies.
frastructure funds,” he explains. The Actis does its reporting through
section also includes some of the “soft- the conventional PE route of secure
er” activities, like ESG-focused media data rooms, slick presentations and
articles that Actis has participated in or high-touch investor relations. Like
panels it has contributed to. The aim, most firms, it has not yet made use of
says Magor, is to “show our investors the budding market for high-tech in-
that this is truly authentic to Actis. It is vestor communications on ESG.
about our leadership in the market and As and when Actis and its GP peers
not just some sort of glossy bolt-on”. decide to automate or streamline ESG
reporting, tech providers and consult-
Stories behind the data ants will be ready. One such service
In a conversation about gathering and provider, Apex Group, has launched a
imparting quantitative ESG data, the product – a combination of a software
subject turns to the more familiar terri- platform, data methodology and con-
tory of qualitative information. Magor sultancy – that facilitates the regular
says feedback from investors suggests collection of ESG data from portfolio
they are interested as much in the quali- companies, benchmarks each company
tative information as the hard data. “It’s against its peers and allows the spon-
not just pulling down numbers and fig- sor to aggregate data and present them
ures – jobs created, tons of CO2 avoid- to investors in a dashboard format. It
ed,” he says. “It’s the human-interest will also produce gap analyses on each
stories.” portfolio company, identifying how it
He refers to building properties for scores on each of the criteria against
the Masai community around a wind the global standard.
farm in Kenya, and stresses the impor- Andy Pitts-Tucker, a long-time
tance of communicating this story in banker (and sometime conservationist)
a meaningful, “non-trite way” – with who joined Apex to help shape its ESG
“really great imagery” – about how offering, says the firm spent “about a
private capital is improving lives. “We year” working out the methodology
know our investors really enjoy that, and exactly what data should be includ-
because if you’re sitting in an office in “It’s not just pulling ed in the platform: “We tried to work
New York, you feel disconnected from out what is best in class; what do all
a wind farm in Kenya.”
down numbers and the LPs generally want; what is going
That is not to say the firm eschews to satisfy legislation; what do stock ex-
figures – jobs created,
hard numbers. Actis developed and changes require if you are thinking of
launched its own impact scoring system tons of CO2 avoided. IPOing?”
– based on the work of the Impact Man- There is an 80-page report “which
agement Project – which it has made It’s the human- defines how every single data point is
available to any other managers wishing matched to a global standard”, he adds.
to use it. In the same way that investors interest stories” “We have sought to collect data that
will be given an idea of the financial re- helps investors understand the align-
turn they should receive from a fund, JAMES MAGOR ment of their underlying investments
they will also have an idea of the impact Actis to the major global standards, to reg-
expected to be generated and whether ulation and to organisations and asso-
the fund is on track to achieve this. ciations like the Sustainable Develop-
It is not easy to collect consistent, ment Goals and the UN Principles for
relevant data from across an entire Responsible Investment, which seem
portfolio when investments are in dif- to be significant driving forces at the
ferent sectors. The impact score was moment.”
created to allow effective compari- The firm has onboarded “dozens”
son between the impacts of otherwise of clients from across private markets,
February 2021 • Responsible Investment 11Analysis
says Pitts-Tucker. He expects that, hav- and, in turn, adoption of products like
ing conducted the exercise once – es- those from Apex and IQ-EQ. “We
tablishing the baseline for each of the “With the SFDR have a product that helps investment
portfolio companies – GPs will repeat managers collect data on themselves,
it on an annual basis. He notes, how- regulation coming which is going to help them align with
ever, that some LPs are looking for SFDR,” says Apex’s Pitts-Tucker, who
very specific metrics relating to emis-
into play in March anticipates a “scramble for the line”
sions to be updated and communicated
2021, we wanted to reminiscent of the rush to comply with
quarterly. the EU’s General Data Protection
IQ-EQ, an investor services group, use metrics that are Regulation as March approaches.
officially launched a product to “iden-
tify and mitigate ESG-related risks” in accessible, useful and Looking for commitment
January this year. The product – called Impending European regulation aside,
IQ-EQ Compass – is an ESG-focused more standardised” we should not get ahead of ourselves.
module that operates alongside its ex- The private capital industry may have
isting portfolio performance reporting HUGH STACEY a penchant for investing in tech com-
platform, IQ-EQ Cosmos. IQ-EQ panies, but GPs are not noted for being
So, while Cosmos delivers an in- early adopters of tech when it comes
vestor dashboard covering the likes of to their own operations. Many are still
net asset value, internal rate of return, wrestling with their conventional in-
and funded vs unfunded comparisons, vestment data and wondering how to
Compass delivers data based on the set bring automation to bear on that. At
of Core Metrics outlined by the World the same time, ESG policies, let alone
Economic Forum. data, are not yet standard practice
The WEF’s Core Metrics are a set of among GPs.
21 data points – grouped under ‘princi- A world in which an LP pulls up
ples of governance’, ‘planet’, ‘people’ a dashboard to check for substantial
and ‘prosperity’. The core metrics are movements in its private equity portfo-
described by the organisation as being lio’s carbon footprint, or whether there
“more-established or critically impor- has been a reduction in health and safe-
tant”, and “primarily quantitative met- ty incidents, is still a long way off.
rics for which information is already To focus too much at this stage on
being reported by many firms (albeit data may – to some extent – miss the
in different formats) or can be obtained point. As Actis’s Magor notes, LPs val-
with reasonable effort”. ue narrative. And as the private bank
Why go for the WEF’s metrics? PE head puts it: “Our clients are not
Hugh Stacey, the executive director very interested in the data. They are
in IQ-EQ’s investor solutions team more concerned about generally mak-
responsible for the Compass launch, ing sure that whoever is managing their
says one factor was the impending ar- wealth is going to be a good steward of
rival of EU rules around sustainability. their capital, full stop. They are much
The Sustainable Finance Disclosure more interested in selecting managers
Regulation will require asset managers based on a commitment to ESG than
doing business in the EU to make de- measuring a tangible impact.”
tailed disclosures about the sustainabil- That said, service providers in this
ity of their investment approaches and space are confident that demand for
portfolios. “With the SFDR regulation their products is only going in one
coming into play in March 2021, we direction. “Every day we are demoing
wanted to use metrics that are accessi- our product multiple times a day and
ble, useful and more standardised,” says we have a huge number of discussions
Stacey. going on,” says one service provider.
Regulation is likely to be a signifi- “People are signing up very actively.
cant driver for improved ESG reporting It’s great.” n
12 Private Equity International • February 2021Analysis
K E Y N O T E I N T E R V I E W
ESG: The end of
the beginning
While engagement remains patchy in some regions, Aberdeen Standard Investments’
Alistair Watson, Alan Gauld and Stephanie Kempton expect ESG integration
to soon become the industry norm
GPs had plenty to keep them occupied ESG integration as a hallmark of qual-
SPONSOR
in 2020, including the move to remote ity both at a GP level and when assess-
ABERDEEN STANDARD
working and the need to work closely ing co-investments. Strong ESG man-
INVESTMENTS
with portfolio companies impacted by agement is essential to running good
lockdowns. Despite these challenges, businesses and generating returns.
many have also spent time improving
their environmental, social and gov- Alistair Watson, investment director Alan Gauld: If you have a firm grasp
ernance performance. Alan Gauld, and investment manager of ESG in a business you can mitigate
This is a finding of a recent sur- Stephanie Kempton, to find out more risks effectively, but we also see value
vey conducted by Aberdeen Standard about the survey results and how the creation stemming from this. ESG
Investments. A snapshot of private industry is addressing ESG. provides insight during the due dili-
equity’s progress in ESG undertaken gence phase, protects downside and
annually since 2015, the survey com-
prises responses from 104 private equi-
ty managers and 40 of ASI’s co-invest-
Q Why is ESG important to
you as an LP?
Stephanie Kempton: Fundamental-
creates value during the investment.
Research suggests that ESG leaders are
more marketable on exit and are attrac-
ment portfolio companies. We caught ly, ESG is important to ensure we are tive to a broader set of buyers.
up with members of ASI’s private eq- good custodians of the money we man- ESG is not new to us and responsi-
uity team, senior investment director age on behalf of our clients. We see ble investment has been a longstanding
February 2021 • Responsible Investment 13Analysis
Describe how you identify, assess and What diversity-related targets do you set Has covid-19 changed your approach to
manage climate related risks within portfolio for your portfolio companies? How do you ESG? (%)
companies: (%) monitor progress? (%)
100 100 100
80 Robust 80 Robust 80 Improvements
implementation implementation made and/or
60 60 60 focus increased
Implementation Implementation
in progress in progress No, but robust
40 40 40 ESG approach
Not implemented Not implemented already
implemented
20 20 20
No
0 0 0
Source: Aberdeen Standard Investment’s 2020 Private Equity Responsible Investment Survey
focus of ours. Aberdeen Standard In-
vestments has been a PRI signatory
for over 10 years and became carbon
Q Why do you conduct the
responsible investment
survey?
invested more capital in ESG systems
and people, which is resulting in better
ESG data. However, we don’t believe
neutral in 2019. Yet, we do see some AG: When we started the survey in that larger managers have a greater
who remain sceptical of ESG. They are 2015, it was becoming clear that ESG ESG cultural buy-in than smaller man-
entitled to be, but they cannot deny the was going to be a major factor in the agers, it’s more a factor of resource.
$30 trillion capital shift that is under- success of private equity investments.
way towards millennials and younger Yet we were getting inconsistent or AW: In our co-investments, we can
generations. These are generations little information from managers and have a strong influence and get live data
that care much more about sustaina- portfolio companies, so it was designed on how companies are managing ESG.
bility factors than their predecessors. to understand what was happening In the latest survey, we included co-in-
There is also regulatory pressure – for within private equity firms and their vestments for the first time. We had a
example, the UK government recently portfolios. When we analyse managers, 95 percent response rate, so it provides
announced that climate-related disclo- we need to cut through the marketing useful ESG information across the port-
sures will become mandatory for large around ESG and try to benchmark ESG folio: whether companies have an ESG
private companies by 2025. You can put performance with the aim to eventually policy in place and are tracking ESG
your head in the sand if you like, but help drive tangible improvement. key performance indicators, as well as
ESG regulation is coming. ongoing ESG initiatives and important
SK: The survey has an important role more specific topics, such as employee
Alistair Watson: There is sometimes in our fund and co-investment deci- engagement and cybersecurity. In addi-
an allegation that ESG is just cosmetic sion-making and we have incorporat- tion, it highlights areas of weakness and
– we want to get beyond that by start- ed it into our investment processes. It potential improvement – here, I would
ing with reporting and metrics and is a good bellwether for how manag- point to female board representation
then demonstrating how change and ers look at ESG and helps us analyse and measurement of carbon footprint.
value builds over time. We are looking trends, such as the increasing impor-
for managers that make changes rather
than just report on metrics. Companies
that are performing resiliently despite
tance of the UN Sustainable Develop-
ment Goals, as well as how managers
are progressing and what challenges
Q Can you provide some
examples of where you
have seen progress?
the covid-19 disruption, often compa- they face. AG: In 2018, 59 percent of respond-
nies that are anticipating shifts in the Over the years, we have seen GPs ents had an ESG policy; now that fig-
way we work and live, also tend to score continually improving, especially in ure is 73 percent. Half of respondents
well on ESG measures. Importantly we Europe. Even with the pandemic in are now PRI signatories, while in 2019,
are seeing a requirement for increased the background, GPs have continued it was just 38 percent. The survey helps
ESG action and transparency from our to make progress in integrating ESG. us with benchmarking and identify-
own institutional investors, particularly In the latest survey, we also looked at ing who the leaders and laggards are.
in Europe. Asset owners recognise the the difference in ESG performance be- Those making most progress are not
positive impact they can have in climate tween small, mid-sized and large man- always the ones that are best resourced.
change and the drive towards net zero. agers. Larger managers have generally By picking the right battles and having
14 Private Equity International • February 2021Analysis
real buy-in, smaller managers can make seeing definite improvements resulting
a significant difference on ESG. from this engagement.
“As an LP, you should
AW: A third of managers say their ESG
plans are accelerating as a result of cov- Q Where else is there room
for improvement?
never underestimate
id-19. Firms are aligning their invest- SK: The response to our question on the impact you can
ment theses with the SDGs, and some diversity-related targets continues to
are becoming B-Corps or joining Initi- be underwhelming. Only 23 percent have just by asking the
ative Climat International. The penny were able to articulate the diversity
appears to have dropped, and we are targets in their portfolio companies, right questions”
now seeing real cultural emphasis. although 47 percent are intending to
incorporate these in the near term. ALAN GAULD
Q Another key finding is that
European managers have
embraced ESG much more than
This will become more front of mind,
especially as ILPA has launched its Di-
versity in Action initiative. Some GPs
those in the US or Asia. Why do are running projects to help people of few years back, for example, with three
you think this is? all backgrounds enter private equity or smaller European GPs where ESG was
AG: There is real momentum in Eu- finance, but it must be a cultural shift, not a major consideration but senior
rope, and, while we are seeing encour- not just target-driven. partners were open to implementing
aging signs, the US and Asia are be- ESG and engaging with us. We sup-
hind Europe. Some of this is cultural, AW: Private equity-backed companies ported them on areas such as ESG
but it is also because Europe has been tend to have GP representatives on policy and what good implementation
the genesis of ESG. Europe benefits boards and since (reflecting the cur- looks like. We can help support GPs
from the political will of the EU and rent make up of GPs) these are mostly because we bring a holistic view from
local governments to act on ESG issues male, that presents a challenge when across the market. The ESG practices
and so the region has a head start. It you look at female board representa- of these GPs today compared with a
just means we must engage more with tion. Of course, we also want to see in- few years ago are like night and day. As
some US and Asian funds – we do not creased female representation in senior an LP, you should never underestimate
screen out all investment opportunities management teams. the impact you can have just by asking
that are not perfect on ESG grounds. the right questions.
We are happy to invest and work with
GPs that are open and show a desire to
improve their ESG credentials and are
Q How can you help GPs
improve?
AG: Engagement is key. We invested a
AW: It can also help to talk about ex-
amples of best practice and positive
change in our portfolio. We are not
just looking to invest in ‘ESG perfect’
Q How will ESG develop in private equity over the medium
term?
AG: I believe that we are at the end of the beginning of the journey
businesses, but also businesses that have
a propensity to drive positive change
in ESG matters. Industrials businesses
towards ESG being truly integrated. The last five years have been about are not always associated with positive
firms developing their ESG policies and processes, setting the foundations ESG credentials, but, for example, we
in place. If we were to look at the European market five years from now, are encouraged by progress at investee
I am confident that ESG will be largely integrated into reporting and company, Sulo (lead sponsor Latour
into LP-GP and GP-portfolio company discussions. This will be the way Capital), a French-headquartered waste
private equity does business and LPs will receive ESG metrics alongside container manufacturer. Under current
the usual financial data. Regulation will accelerate change and we will likely ownership Sulo was the first French
see a more consistent approach to ESG reporting than at present. company to be awarded the Circular
Economy certification, due to its suc-
AW: Over the next few years, private equity will move from a catch- cess producing waste containers made
up phase to one where ESG is measured and reported and the impact from 100 percent recycled and recycla-
becomes more evident – with the increased cultural buy-in to ESG we are ble materials. Latour and management
experiencing amongst private equity managers, we will see tangible results are striving to further increase the use
as well as the metrics. of recycled materials from what is al-
ready a market leadership position. n
February 2021 • Responsible Investment 15Analysis
Climate:
What investors want
Investors are starting to ask more of their managers when it comes
to climate strategy, writes Toby Mitchenall
L
ast November, Private Equi- credit, but not PE, and is predicted to towards a 1.5C target in the long term.”
ty International’s Responsible be managing £100 billion by the end of The pension also expects its manag-
Investment Forum: Europe the decade. As a young scheme – half ers to report against the Task Force on
opened with a sobering key- of its savers are under 35 – its priorities Climate-related Financial Disclosures
note. Emily Shuckburgh reflect the horizons of its members. by the end of 2021, and is divesting
OBE, a climate scientist “We believe we have a social respon- from sectors with high climate risk,
and director of the University of Cam- sibility to contribute to a world which such as thermal coal, oil sands and arc-
bridge’s climate initiative Cambridge is fit for our members to retire into and tic drilling.
Zero, delivered a lightning quick over- enjoy their savings,” said Diandra Soo- The Office of New York City
view of the current state of our planet. biah, head of responsible investment Comptroller, which manages $229 bil-
Among the many alarming reve- for the pension, at the Forum. To that lion of assets across five public pension
lations – versions of which you might end, Nest established a climate policy funds, is at an earlier stage in its move to
have been hit with before – was her in 2020 that aims to halve its portfolio sustainable investing. However, Cris-
reading of how 2020, a year in which emissions by 2030 and reach net zero tian Norambuena, a senior investment
the pandemic had all but halted global by 2030. “We are working very closely officer at the pension system, said at the
travel, affected global carbon emissions. with our fund managers in setting out Forum that it had already been actively
“It is likely that 2020 will see a dip as a targets and expectations on how we exploring commitments to buyout and
consequence of the global lockdown,” expect them to evolve over time,” said growth fund managers whose “invest-
she said. “But the sort of dip we will see Soobiah. “We are asking them to think ment strategies are related to climate
is only the scale of change that we need about how to evolve their strategies change or usually back companies with-
to see year-on-year-on-year for the in the energy transition trend”.
next 20 years or so. That highlights the He added that the pension system’s
scale of the transition required.” two main climate change initiatives –
How are institutional investors ad- as announced in 2018 – involve dou-
dressing the risks and opportunities “The level of detail bling its investment in climate change
associated with climate change? And solutions from around $2 billion to $4
what does that mean for private mar- and number of billion across public and private assets,
kets managers? and evaluating divestments in fossil
Nest is the UK’s national defined questions has rapidly fuel-related investments. Norambue-
contribution system for savers who are na said that, along with energy transi-
auto-enrolled into workplace pension
increased over the past tion-focused GPs in its $14 billion PE
schemes. Established in 2010, it is now
two years” portfolio, the investor is also spending a
the largest UK pension by number lot of time on impact funds dedicated to
of members and manages more than climate change and goals such as finan-
JULIA WIKMARK
£13 billion ($18 billion; €15 billion) cial inclusion and healthcare.
EQT
in assets. It currently invests in private Climate risk and opportunity is “an
16 Private Equity International • February 2021Analysis
private markets firm EQT. “The level
of detail and number of questions has
rapidly increased over the past two
years, both in terms of EQT’s own op-
erations and portfolio performance,”
she tells PEI in January. Examples of
frequently asked questions relate to
greenhouse gas emissions (reductions
or target setting), fossil fuel exposure
and disclosures in line with the TCFD
recommendations.
When it comes to climate-related
reporting, the TCFD has proved to
be a framework around which organ-
isations have coalesced. PAI Partners,
a European private equity firm with
€13.9 billion in AUM, used it to formu-
late its own climate strategy, according
to Cornelia Gomez, its head of ESG
and sustainability.
“You start by calculating the carbon
footprint, but when you have to act on
it you don’t have the strategy or the
framework to do so” she told the Fo-
rum in November. “That’s where the
TCFD comes in super useful.” She
recommended it as a “very well written
scenario” to GPs currently thinking
about how to approach climate.
If you are a GP that has yet to for-
mulate a climate strategy, you are not
alone, according to Suzanne Tavill,
managing director and head of respon-
sible investing for StepStone Group.
She told delegates that there is a broad
range of preparedness on this topic
that, to some extent, is drawn along ge-
ographical lines.
important part” of the ESG agenda 700 companies, “but we get a good “Europe and the UK are definite-
for Argentum Asset Management, a view of the most relevant companies ly leading,” she said. “We see it when
private equity investor owned by the in the portfolio”, says Vassengen. His we conduct due diligence… who’s got
Norwegian government, says Jon colleague, senior associate Christoffer ESG policies, climate policies. Asia is
Fredrik Vassengen, a manager at the Gundersen, notes that, in 2019, the LP quite mixed in terms of geography –
investor who covers ESG. Part of its received carbon emissions reports on there is certainly increased awareness
due diligence covers climate, but its twice as many companies as in 2018, in Japan and parts of China.
expectations for new managers also confirming that an increasing number “The unfortunate laggard is the
take into account where they operate of companies have this data available. US. [However,] we are certainly see-
and in what sector. “It is not a one-size- ing signs of that changing: both from
fits-all approach,” says Vassengen. Getting into the detail a number of GPs and the LP universe
Argentum, which has €1.6 billion From the fund manager’s perspective, becoming more vocal on the topic and
under management, asks GPs for the demand for climate-related infor- adopting climate change policies.” n
portfolio company emissions data. It mation is on the rise, says Julia Wik-
does not receive data for all the circa mark, sustainability manager for global Carmela Mendoza contributed to this report
February 2021 • Responsible Investment 17You can also read
