Case study by CapMan Russia
- Regional operating units of international PE firms may vary the intensity of ESG integration according to the characteristics of the region.
- DFI LPs have high ESG performance requirements and this will drive ESG integration in regions where DFIs are active.
- GPs can use LPs’ reporting templates as a basis for their own system for monitoring and reporting on ESG.
CapMan Group is a listed PE fund manager with €3.3 billion under management. The firm has five partnerships: Buyout, Russia, Credit, Public Market and Real Estate. At the end of Q1 2013, CapMan’s portfolio consisted of 39 companies and 57 real estate assets.
CapMan’s equity and mezzanine funds invest in Nordic and Russian companies and its real estate funds invest in commercial and hotel properties and property development projects in the Nordic countries. CapMan’s two other investment partnerships, Technology and Life Science, focus on developing and exiting their current portfolio companies. This case study focuses on CapMan Russia specifically.
Approach to responsible investment
CapMan Russia is committed to promoting responsible business practices in its portfolio companies and leads by example by integrating ESG into its own business activities. It has appointed an internal manager contact to be responsible for coordinating ESG issues within CapMan Russia and liaising with the CapMan Group ESG manager. CapMan Russia is responsible for the practical implementation of the CapMan-wide ESG policy in Russia. CapMan Russia’s ESG guidelines and practices may sometimes be stricter due to demands by its DFI investors.
In Russia attention to ESG issues has increased significantly, especially in the last 5-7 years. The LPs are the most important driver for this development, with high performance requirements set by the IFC and EBRD. Adherence to these requirements is monitored by the investment managers and portfolio company management. To support their investment managers in this, CapMan Russia has arranged training by external consultants on ESG issues.
ESG has been integrated into CapMan Russia’s due diligence process and involves the ESG manager’s participation from the start.
CapMan excludes several sectors, so the first step in initial due diligence is to check against this exclusion list. The next step is to screen the nature of the potential investment to determine the scope of the ESG due diligence that will be required. If a potential investment is categorised as ‘low risk,’ CapMan Russia will conduct the ESG analysis using its own resources. If a company is classified as ‘medium risk’ or ‘high risk’, CapMan Russia will hire external ESG consultants to perform a detailed due diligence. These consultants are asked to map out the relevant ESG issues and draft a post-investment ESG action plan in alignment with IFC and EBRD standards. Apart from checks based on CapMan Russia’’s own ESG policy and assessment of the inherent sector/geography related ESG risks, the external consultant’s ESG assessment can also include site visits and the evaluation of the portfolio company’s quality of management of ESG issues (i.e. their commitment, capacity and track record in this area).
CapMan Russia may decide not to invest in businesses that contain high ESG risks. However, a poor ESG score does not automatically prevent an investment if the target has potential for value creation through improvements in ESG performance. To support the investment committee’s decision-making process, the post-investment action plan drafted by external consultants will be attached to the investment documentation in the form of an ESG roadmap.
CapMan Russia expects its portfolio companies to commit to ESG improvement plans. The boards of the portfolio companies are expected to address ESG risks and opportunities that were identified during due diligence. In addition, each portfolio company is required to draw up a programme for good corporate governance. The ESG performance of portfolio companies is monitored by regular site visits, management and board meetings, and annual reporting.
After the deal CapMan Russia provides reporting templates to the portfolio company, which can be used for providing information for CapMan’s annual ESG report. These templates are based on those of the IFC and the EBRD, but Capman Russia has made a single template that fulfils all the different demands of the different LPs.
CapMan Russia is increasingly integrating ESG issues into its financial monitoring process. ESG issues are included in the reporting for all companies with each portfolio company required to provide an annual ES Performance Report to CapMan Russia.
CapMan Russia compiles an annual ESG report for its LPs. The report is compiled in conjunction with the portfolio companies and includes ESG improvement opportunities.