Case study by Global Environment Fund
- A GP can identify the rationale for a prospective investment through an ESG lens.
- A GP can use local consultants to review the prospective company fs compliance with local and national laws, as well as IFC Performance Standards and Guidelines.
- During due diligence, a GP can work with the prospective company to identify an ESG action plan which the company is then bound to in the investment documentation.
Global Environment Fund (GEF) is a global PE investment management firm with approximately US$1 billion under management with a focus on clean energy, energy efficiency, environmental services and natural resources. Established in 1990, GEF invests growth capital in established companies answering the global demand for increased efficiency and decreased consumption of energy and natural resources. GEF is organised into three distinct teams covering North America, emerging markets and sustainably managed timberlands. The firm was recognised as the Sustainable Investor of the Year in 2009 and 2010 by the Financial Times.
Approach to responsible investment
For GEF, ESG processes are embedded in the portfolio through strategic, management and operational activities. GEF believes that companies with proper environmental and social practices are more likely to be exited with higher valuations than non-compliant competitors. This is especially relevant if the company is acquired by multinational strategic players unwilling to take on the significant potential liabilities of companies exhibiting substandard practices. In addition, international buyers often require clean and efficient transaction processes, where a company can be a more attractive target when demonstrating higher quality documentation, management practices, and sustainable operations at international standards.
GEF has integrated ESG principles through its investment decision-making and portfolio management processes, collectively known as the GEF Sustainable Investment Approach, which is overseen by the firm’s leadership. GEF investment teams are supported by dedicated ESG and portfolio management resources.
Example: Red Ambiental
To illustrate some of the elements of the Sustainable Investment Approach, GEF’s investment in Red Ambiental provides a practical example. Red Ambiental is a Mexican integrated waste management company providing waste collection and disposal services.
Energy or environmental rationale
As a first step GEF identifies the energy or environmental rationale for an investment, in addition to the commercial and finance opportunity. Through its engagement in the global waste sector, GEF recognised that Red Ambiental addressed Mexico’s need for modernisation in the waste management sector by already meeting, and in some cases exceeding, local environmental standards. Access to GEF’s capital would enable Red Ambiental to scale nationally while improving operations to meet international waste management standards.
GEF follows a due diligence process that integrates analysis of the company’s environmental and community footprint, resource efficiency, safety processes, labour management, along with business integrity and corporate governance, into financial, market and operational diligence. For each potential investment, these considerations are mapped and prioritised, with the key issues and risks driving the team’s detailed analysis and the engagement of experts to assist with specific environmental or community issues. For many of its portfolio companies, GEF follows the IFC Performance Standards and Guidelines.
GEF also conducts targeted ESG due diligence according to the investment sector. In the case of Red Ambiental, due diligence was focused on specific issues involved in non-hazardous waste collection, transportation and disposal. GEF’s investment team worked closely with environmental consultants to assess the company’s operations and accompanied them on site visits to Red Ambiental landfills, truck depots and offices. GEF engaged specialised local counsel to review and analyse the company’s compliance with local and national Mexican environmental laws and regulations, as well as IFC best practices for the industry. Opportunities for improvement and areas of potential liability were identified, assessed and prioritised in discussion with management. For example, a process was sought to enhance the safety of local families who make their livelihood as landfill waste scavengers (known locally as pepenadores).
GEF then developed an Environmental and Social Action Plan (ESAP) in conjunction with management prior to closing the transaction. The Red Ambiental ESAP contained company-wide and site-specific items, such as drainage pumps, landfill permits, and obtaining additional environmental and civil society permits.
The ESAP is incorporated into the investment documentation. Management is bound by the Shareholder Agreement to follow GEF’s ESG policy and implement the ESAP.
During the ownership phase, management of the portfolio company will work with the GEF investment team to implement the ESAP. Red Ambiental’s management has incorporated the ESAP into their core management systems under the direction of the COO, while demonstrating its ongoing commitment to best practices through the pursuit of ISO 9001 and 14001 certifications. In some cases, an annual third-party environmental and social audit is also performed to confirm progress and identify future issues.
GEF uses an annual ESG monitoring report to measure the company’s progress on a variety of ESG factors, comprising of both quantitative and qualitative KPIs. GEF presents an Annual ESG Report to its investors.