3. How do you contribute to portfolio companies’ management of ESG-related risks and opportunities?

Having established an understanding of the GP’s responsible investment policies, an LP could then ask the GP to demonstrate how their investment decision-making processes will protect and/or create value by identifying and managing ESG-related risks and/or opportunities. An LP could also establish whether the GP has the capacity, commitment and capability to execute these processes.

3.1 Upon investing in a company, would you review existing compliance with sustainability or ethical business guidelines, or introduce new guidelines if necessary?

Company guidelines

The CDC ESG toolkit for fund managers and the IFC FIRST portal give an overview of the international conventions and standards that a company may need to comply with. The IFC FIRST portal also gives an overview of various international sustainability standards and industry certifications, which have been established to promote more sustainable business practices. The UN Global Compact is the world’s largest corporate sustainability initiative, which supports companies to align their strategies and operations with Ten Principles on human rights, labour, environment and anti-corruption.

3.2 What monitoring processes would you have in place to assess portfolio companies’ management of ESG factors

Developed questioning

  • What is your process for grading ESG risks and/or opportunities that may arise during ownership?
  • How do you ensure that the appropriate measures are in place to conduct ESG due diligence on any bolt-on acquisitions that a portfolio company might make?
  • What mechanism are you using to collect and track ESG-related information?
  • Indicate the type and frequency of reports you request and/or receive from portfolio companies covering ESG issues.
  • Do you require portfolio companies to report on specific ESG-related performance indicators? If so, are any of these indicators general to all portfolio companies?
  • Do you track the proportion of your portfolio companies that have an ESG/sustainability-related policy (or similar guidelines)?

Industry resources for monitoring

Sustainability reporting standards and guidelines that may help identify the relevant ESG factors to monitor at each portfolio company, and how.

CDP questionnaires– to address exposure to climate change, deforestation, water scarcity and supply chains.

G4 (Global Reporting Initiative)– sustainability reporting standards that also offer sector-specific guidance.

SASB (Sustainability Accounting Standards Board)– industry-specific sustainability standards to help determine which ESG issues are likely to be material and the associated metrics for reporting.

International Integrated Reporting Framework– guidance for companies on how to develop an integrated reporting system that incorporates both financial non-financial information, the primary purpose of which is to explain to providers of financial capital how an organisation creates value over time.

In practice: Apax Partners

Apax Partners LLP (Apax), a global buy-out firm based in the UK, runs an annual data collection cycle designed to highlight each portfolio company’s ESG performance in its key areas of risk and opportunity. To facilitate and streamline the data capture, Apax uses a specific sustainability software solution, CR360, which also functions as a central repository for portfolio company ESG information and its related supporting documentation.

Apax established a set of 80 ESG key performance indicators (KPIs) in 2012 based on the Global Reporting Initiative (GRI), specific LP questionnaires and other resources focused on the reporting of non-financial metrics. The KPIs consist of qualitative and quantitative data and binary yes/no inputs. Each portfolio company provides their KPI data to Apax on an annual basis, thereby creating an in-depth data base of ESG information across the Funds’ portfolio companies. As a result each portfolio company is able to maintain, track and record its own ESG data and to additionally tailor specific KPIs, if needed.

Apax believes that its approach to obtaining ESG KPI data from the Funds’ portfolio companies follows the growing public equity practice to integrate financial and nonfinancial metrics to provide a thorough understanding of all the material components of long-term value creation within a business.

The ESG KPI information received from the portfolio companies provides valuable insight into the profile of each company, which enables the deal teams and the Apax Operational Excellence team to focus its efforts in driving value creation, for example through resource efficiency programmes. Moreover the information provides further insight into the materiality of certain ESG factors to the portfolio.

For Apax, the key benefit of the KPI collection is that it affords significant visibility and relevant data capture, which in turn drives improvement of the ESG footprint across the overall Apax portfolio. And, crucially, through this mechanism the firm is able to provide ESG performance data to its LPs on a continuous basis.

In practice: RobecoSAM Private Equity

RobecoSAM Private Equity (RobecoSAM PE), the private equity division of Robeco and RobecoSAM, an investment specialist in sustainability investing based in Switzerland and the Netherlands, has a comprehensive system in place to monitor GPs on their management of ESG risks and opportunities in the portfolio. Through its ESG Due Diligence and annual ESG questionnaires, RobecoSAM PE asks private equity managers whether they track any ESG-related performance indicators for their portfolio companies or funds as a whole. It is very important to RobecoSAM PE that GPs are able to demonstrate effective ESG integration beyond due diligence, and to get assurance that their GPs are monitoring the most relevant risks and opportunities facing their portfolio companies.

RobecoSAM PE decided that, given the diversity of funds that they invest in, it made little sense to define a standard set of ESG-related performance indicators for all GPs to report on. Post-investment, through their annual ESG questionnaire, they do however list a number of example ESG performance indicators that GPs could report on, such as total direct or indirect greenhouse gas emissions, turnover rate and the number of incidents of customer privacy breaches per year. RobecoSAM PE will analyse the ESG information collected by their GPs and evaluate its materiality for the sectors and companies it relates to. This will allow RobecoSAM PE to better understand how their GPs are integrating ESG factors in their monitoring processes. RobecoSAM PE also uses this information to assess the ESG performance of the funds that they invest in – every PE fund receives a score that is based on a combination of the fund’s ESG strategy and an assessment of how that strategy has been implemented within the underlying portfolio companies.

The majority of their GPs do collect ESG information but it tends to be company-specific - and RobecoSAM PE finds that the number of GPs that are able to provide aggregated ESG information for their funds is still very limited. However things are changing fast in this respect.

As certain ESG-related performance indicators, such as carbon emissions, electricity/water used and number of jobs created, become more widely and consistently used, RobecoSAM PE does not exclude the possibility that they may ask GPs to provide information on specific ESG-related performance indicators in the future. This will ultimately allow them to analyse the ESG-related performance of their underlying investments.

3.3 Give 2-3 examples of how you have contributed to portfolio companies’ management of ESG factors. Specify which initiative(s) you worked with management to identify and instigate, which you supported your portfolio company to achieve (and how) and/or what the portfolio company was already doing that you identified as existing good practice. 

Developed questioning

  • Are you able to connect us with the relevant staff at 2-3 portfolio companies from a previous fund who would be able to discuss your commitments to ESG integration with us?

Portfolio of company references

LPs should note that it would be good practice to integrate ESG-related questions into commercial conversations that they may already be conducting with a GP’s portfolio company references, where possible.

3.4 How do you assess that adequate ESG-related competence exists at the portfolio company level? How do you ensure that portfolio company management devotes sufficient resources to manage ESG factors that have been identified?

Developed questioning

  • Specify which function/position/role at the portfolio company is typically made responsible for ESG performance. Describe what assessment of their ESG-related expertise is conducted recognising that the management of ESG factors encompasses a broad range of specialisms.
  • Describe what training, assistance or additional resources you typically provide to your portfolio companies to help them understand the relevance of managing ESG factors and to enable them to do so.
  • How do you facilitate best practice sharing between portfolio companies?
  • If you engage external expertise to assist the portfolio company in their management of ESG factors, describe what type(s) of service is provided. Specify whether the external specialist is typically employed by the GP or the portfolio company.
  • How is senior management incentivised to manage potentially material ESG factors?
  • Describe the range of actions that you may take in the event that the portfolio company management does not adequately address ESG factors.

Implementing an ESG action plan

CDC ESG toolkit for fund managers– offers guidance on when an ESG Action Plan is required, and how to work with company management and consultant to deliver it.

IFC ESMS implementation handbook– provides instructions on how to develop and implement an Environmental and Social Management System in line with the requirements of IFC Performance Standard.

In practice: PAI Partners

French buyout firm PAI Partners has, over recent years, worked to deeply integrate ESG factors into how they invest in the belief that attention to ESG issues can contribute to financial outperformance. In working to deliver that outperformance, ESG due diligence and postacquisition audits are standard practice. PAI portfolio companies regularly meet to share their experiences of managing sustainability issues.

One of the strengths of the private equity investment model is that it creates a portfolio of companies with common ownership. This provides opportunities to share experiences between portfolio companies – and ensure that lessons are learned and acted upon. Since 2011, PAI has organised a biannual meeting, the “PAI Sustainability Club”, to encourage dialogue between portfolio company managers responsible for ESG. These in-person meetings are a key feature of the PAI ESG programme. Firstly, they provide ESG managers with invaluable expertise either from external consultants or their peers. Secondly, they allow portfolio companies to discuss common issues and share best practices.

The Sustainability Club also acts as a privileged channel of communication between PAI and portfolio companies. The PAI ESG strategy is presented during these meetings, and portfolio company ESG policies are also introduced and discussed within the group and with PAI in order to ensure continuous improvement. The meeting topics are proposed and chosen by the ESG managers and PAI will source the requisite expertise from external consultants and from PAI professionals to address these topics. Presentations, workshops and lessons allow for creative interaction and brainstorming.

3.5 How do you use your interaction with the board to influence the portfolio company’s management of ESG factors?

3.6 Do you systematically incorporate ESG considerations into preparations for exit? If yes, please describe your approach. If not, please explain why.

Developed questioning

  • Have you, with past investments, managed to quantify, value and/or highlight the benefits of good ESG management in order to achieve a higher valuation at exit?
  • Have you produced an ESG Vendor Due Diligence (VDD) report, or included an ESG section in a VDD? If so, for which companies?

In practice: Ardian

At Ardian, an independent private investment company with US$50 billion managed and/or advised in Europe, North America and Asia, responsible investment is at the heart of their approach. Ardian considers that integrating factors into investment activities has a positive impact on the growth of their portfolio companies and favours a mainstream approach that integrates ESG factors at every step of the investment process: from due diligence right up to exit.

Ardian believes that ESG integration in portfolio companies should be results-driven – and results are only truly recognised at exit. By conducting an ESG Vendor Due Diligence (VDD), Ardian is able to communicate the value of ESG integration in practice, beyond goals and action plans. For example, during the ownership period of portfolio company Diana, Ardian performed four ESG reviews over seven years. One of the most important ESG goals was to achieve a 0% accident rate, a goal that the company’s staff rallied behind. When approaching exit, Ardian decided to perform an ESG VDD in order to assess the financial and extra-financial benefits of ESG policies such as the 0% accident rate policy, and to measure the transformation of the company in terms of ESG beyond daily or annual monitoring. The results of the ESG VDD provided concrete evidence of its added value, prompting two potential buyers to request interviews with the ESG consultant who conducted the VDD.

By asking a GP about their ESG-related exit practices, LPs will get a better understanding of how the GP thinks about ESG integration in terms of value and of the penetration of their ESG integration practices throughout the investment cycle.

3.7 Do you measure whether your approach to ESG factors has affected the financial and/or ESG performance of your investments? If yes, please describe how you are able to determine these outcomes.

Developed questioning

  • Provide examples of how ESG factors have impacted the financial performance of previous investments.

In practice: Partners Group

Partners Group is a global private markets investment management firm with over USD 47 billion in investment programs under management (as of Q3 2015) in private equity, private real estate, private infrastructure and private debt.

When integrating ESG factors in due diligence and during the ownership period Partners Group:

  1. Assesses how ESG factors affect returns in specific investments;
  2. Measures the impact of ESG factors on returns.

The investment that Partners Group and Quadriga Capital made in AHT Cooling Systems GmbH (AHT) illustrates this. AHT is the global leader in producing horizontal refrigeration and freezer cases. It pioneered a cooling technology that is significantly more energy efficient than competing technologies. Lower energy consumption contributes to a cost of ownership for AHT customers approximately half that of competing products. The increased demand that this generated helped drive a 50% increase in revenues during the investment period. Partners Group estimates that about a fifth of the value created by the investment can be attributed to the faster sales growth AHT achieved, that is in part due to its more energy efficient products. In addition, AHT mitigated over 400,000 metric tons of carbon dioxide during the investment period by providing more energy efficient products than competitors.

LP responsible investment DDQ: and how to use it