Case study by Kendall Court
- A GP can review international standards recommended by DFIs and adapt them to the local rules applicable to the region of operation.
- During the investment agreement stage, a GP can stipulate that the portfolio company forms an ESG committee.
- A GP can quantitatively measure ESG improvements where possible and provide companies with the tools that will allow them to do this.
Through growth, Kendall Court intends to achieve societal development and improvement within its operating markets. It uses structured instruments as a tool to invest directly into midmarket companies in Southeast Asia. Presently the company holds eight portfolio companies across different industries.
Approach to responsible investment
Kendall Court believes that by considering the spectrum of ESG issues relevant to an investment, it is possible to identify business problems that are created through a lack of longterm care, convenience, or a wasteful mentality based on false assumptions of resource abundance.
Opportunities in Kendall Court’s target markets are often in high ESG risk industries such as natural resources and plantations. Kendall Court’s approach is not to avoid these high ESG risk sectors; rather, it seeks to promote sound ESG practices for the long-term sustainability of these resource-rich economies.
Kendall Court’s ESG objectives are to mitigate risk and aim to achieve operational excellence, since better-managed companies, including management of ESG aspects, are generally more profitable.
Kendall Court has appointed a dedicated Business Process Specialist that is steeped in ESG practices. The role is responsible for (i) ensuring full compliance with best practice ESG guidelines, (ii) ESG pre-screening and auditing on proposed investments, and (iii) development and implementation of ESG procedures within Kendall Court and its portfolio companies.
Integrating ESG into the investment cycle
Kendall Court has built its ESG system by reviewing the international standards recommended by DFI toolkits and adapting these to the local rules that are applicable to their regions of operation.
Kendall Court uses its own toolkit (based on the CDC toolkit with adjustments made for the Southeast Asia market) to screen for material ESG related risks and opportunities. Portfolio companies are required to adopt the CDC Investment Code or their own code that is of a similar or higher standard. Additionally, Kendall Court applies the IFC Performance Standards when reviewing and examining potential investments on ESG related matters. By using the IFC standards and industry specific standards where relevant (e.g. using LEED in the hotel sector) Kendall Court is able to map out the ESG risks and opportunities and what the potential engagement plan should look like for each investment.
In terms of exclusion, Kendall Court does not invest in companies active in gaming, alcohol and tobacco, defense and projects causing irreversible environmental damage. During detailed due diligence the Business Process Specialist will lead the ESG audit programme and share relevant information with the investment team. Based on the outcomes of the due diligence process, Kendall Court will write a company-specific action plan. ESG related concerns and actions are included in the deal agreement between Kendall Court and the portfolio company.
During the investment agreement stage, Kendall Court will stipulate that the portfolio company forms an ESG committee. This committee will typically consist of 3-6 people, including the portfolio company’s CEO and CFO whenever possible and at least one Kendall Court employee, with Kendall Court’s Business Process Specialist always directly involved. The rationale behind this ESG committee is that inter-departmental coordination on ESG matters is crucial to avoid a silo mentality when it comes to ESG implementation. Moreover, meaningful change requires human capital and resources and the CEO and CFO have decision-making power over these matters.
The ESG performance of portfolio companies is measured quantitatively where possible. Kendall Court’s Business Process Specialist identifies clear targets and KPIs to identify costs savings. To help portfolio companies calculate costs and savings, Kendall Court provides them with self-constructed examples and spreadsheet templates. These examples concern amongst others case studies specific to their sector of operations to encourage positive actions, while the use of templates encourage consistency in comparative reporting from across the portfolio. Examples of the former include highlighting cost savings and actions taken by comparative companies within similar sectors. For the latter they include data capture forms for energy consumption to ensure common data sets across related companies is collected to enable efficient analysis, comparison and recording of impacts during implementation of energy efficiency measures. Thus this approach helps Kendall Court to have a central and streamlined system to monitor ESG improvements and costs savings against the company specific action plans. Additionally, ESG reporting is in itself a way to demonstrate a well-run company and may positively impact the price upon exit.