Case study by Idinvest Partners
- A GP can develop an ESG Profile Review and an accompanying risk rating for potential investments which can then be factored into the investment committee fs decision-making process.
- A GP can set up a system to consistently incorporate findings from ESG due diligence into the investment documentation, creating a traceability for ESG issues identified in the pre-investment review.
- A GP can make use of external assistance in setting up a separate ESG steering group.
Idinvest Partners (Idinvest) is a European PE firm that invests primarily in small medium enterprises. Idinvest has invested in more than 80 high-tech companies offering strong growth potential and has developed environmental expertise having almost €130 million worth of environmentally themed companies (wind, solar, biomass/biogas and hydro power plants) in its portfolio.
Building a responsible investment policy
Idinvest strongly believes in the need to incorporate extrafinancial factors in the business lines while at the same time maintaining a high level of performance. ESG criteria deserves careful consideration, from both strategic and operational perspectives, as a means of creating value and managing risks more effectively with the potential to add value at exit. Since 2002 Idinvest has been engaged with initiatives like Socially Responsible Private Equity (SR-PE) and in 2007 it began to actively translate ESG considerations into its operations. As of 2012, Idinvest entered into a new phase of ESG implementation and consolidation when it formalised its Responsible Private Equity Policy (RPEP) and set up processes to incorporate ESG into its direct and fund of fund investments.
ESG considerations are incorporated into Idinvest’s internal documents, including: the Investment Executive Summary (which incorporates the ESG Profile Review and the ESG risk/rating), the Investment Committee Report (which includes a summary of the ESG Profile Review results, any specific or detailed ESG due diligence that was conducted and the investment decision) and in the Final Investment/Acquisition Recommendation (which includes the summary of the ESG Profile Review results in the form of an investment memorandum).
Idinvest has formed an ESG steering group to steer and monitor Idinvest’s RPEP. It is composed of members of the executive board, the Partner in charge of the project coordination, the compliance officer, and the business development manager. Idinvest works closely with a specialised external consultant to implement, regularly review and report on its RPEP. The Idinvest RPEP is presented at an annual seminar to which all employees are invited to maintain awareness.
Factoring ESG into the investment decision
Typical ESG due diligence for direct investments will involve interviews with senior management and on-site inspections. In some cases external expertise will be consulted. The first step is to integrate due diligence findings into the ESG Profile Review for the investment. This review is based on three criteria: external shareholders (e.g. other PE firms that may be involved), senior management (including criteria such as what is their link with the overall performance of the firm, what is their ESG knowledge, and whether management has the capacity to take action on ESG issues if needed) and business activities (regulatory exposure i.e. Articles 225 and 75 of the Loi Grenelle II, and overall ESG risk exposure in the company industry). This review results in an ESG rating of ‘high’, ‘moderate’ or ‘low’.
Idinvest’s investment committee is charged with examining all ESG Profile Reviews for its prospective investments, and will take the ESG risk rating into account when making the investment decision. Investments with a ‘high’ ESG risk rating are excluded.
If an investment is given a ‘moderate’ risk rating during due diligence, or if a current investment is involved in an ESG incident, then Idinvest will conduct an enhanced ESG analysis. This means working with a specialised consulting firm to prepare a company-specific questionnaire to understand and address the ESG concerns. This questionnaire is completed by the auditing firm that performs the accounting, technical and legal audits for Idinvest prior to investment (or postinvestment in the event of an ESG incident). The findings of this questionnaire will inform the investment decision and the ensuing monitoring process.
Monitoring ESG factors within portfolio companies
Idinvest has periodical discussions with its portfolio companies on ESG. The ESG Profile of each portfolio company is reviewed every 24 months, and in the case of an ESG related incident there will be an additional immediate review. Idinvest expects portfolio company management to be in control of managing any environmental risks commonly associated with the company’s industry. In regards to monitoring social risks, Idinvest works to make sure that its portfolio companies maintain good relations with employees, comply with labour regulations and promote employee engagement and growthsharing. On the governance side, Idinvest monitors the composition of the boards of directors and supervisory boards, the distribution of power among supervisory bodies, handling of conflicts of interest and internal control systems and audit trails.
This year, Idinvest plans to start sending out an annual ESG questionnaire to all of its direct investments (including Debt/ Mezzanine) in order to collect more systematic information on targeted ESG performance indicators. The plan is to develop the detail of these indicators over time to link with the ESG Profile Review of the company.