Interesting developments in PE for ESG + Our PE ESG Survey

This week, we are pausing again our sector heatmaps to focus on a couple of recent ESG announcements which focus on the private equity industry.

Before going into specifics, I want to say that clearly ESG integration is becoming a truly relevant topic for private equity markets globally. And with that in mind, we decided to survey the Mexican private equity ecosystem to have a better idea of how integrated funds are with ESG notions and standards. We sent this survey to a group of PE funds (including CKDs) and hopefully over the coming days we’ll get enough responses to assess where the industry stands. If your organization is a PE fund who invests in Mexico and wants to participate (or if you know anyone who fits the bill), please participate in the survey.

First, earlier this month the UNDP (United Nations Development Programme) issued this report with guidance for private equity funds to align themselves with the UN’s SDGs (Sustainable Development Goals).

This report was authored by SDG Impact, which is led by a team of experts who intend to set different standards for organizations to contribute to the SDGs. We share below what we believe are the key excerpts from the report. Anyone interested in more detail should read the full version since it has a lot of detail and is pretty easy to understand how to apply it to a Fund.

• The Standards are for private equity, debt and venture capital fund managers (Private Equity Fund Managers) who want to make a positive contribution to sustainable development and achieving the SDGs through one or more of their Funds.
• They provide a roadmap and practical guidance to translate that intent to action.
• They are voluntary and freely available for all to use as best practice standards and a self-assessment tool.
• Several stages of consultation, including two public consultations, provided critical practitioner and expert feedback.
• The Standards promote a shift from reporting current activities differently (i.e. using the SDGs as another reporting filter) to doing things differently and making different decisions about what gets done and how it gets done.
• The impact management system set out in the Standards has four building blocks:

o   Putting the Fund’s sustainable development operating context at the heart of purpose, investment strategy and decision making.

o   Aligning with IMP’s Five Dimensions of Impact and ABC Impact Classifications, which provide a shared language of impact and promote standardization

o   Making Stakeholder involvement central to impact management practice

o   Establishing materiality in terms of sustainable development, informed by the SDGs and what matters most to Stakeholders.

• The Standards comprise:

o   Four Standards, one for each of the four themes – strategy, management approach, transparency and governance (the strategy and management approach Standards each comprise multiple components, three and six components respectively).

o   Practice Indicators that demonstrate what achieving each Standard (or the components of each Standard) looks like.

And second, SASB also recently published this report on ESG integration for private equity. We share below what we believe are the key excerpts from the report, but it definitely is an interesting read since it describes the ESG ecosystem well and how the different segments of it interact with the private equity industry.

• Two important trends—sustainability and the continued growth of inflows to private capital—have converged.
• Many attempts have been made to demystify and clarify the ESG space using ecosystem mapping.
• As these maps reflect, the size and complexity of the ESG ecosystem system can be attributed in part to the varying needs of different stakeholders and the initiatives designed to meet them.
• Among 431 private equity firms that directly invest and commit to PRI’s principles, just one in eight (less than 13 percent) publicly disclose that they receive ESG reports from their portfolio companies. Only 16 (less than 4 percent) share whether ESG issues impact financial performance.
• Addressing the need for decision-useful, investor-focused ESG data, SASB Standards identify industry-specific risks and opportunities related to ESG matters and provide associated metrics that companies can use to measure, manage, and communicate their performance in a consistent, comparable, and reliable way.

Integration through the Deal Cycle

1. Sourcing and due diligence: CDC’s guidance notes that certain ESG factors can play an important role in “informing investment decisions by understanding the potential related liabilities, costs and influence on financial performance, and potential opportunities for value creation.” During the due diligence phase, GPs can identify potential ESG metrics to inform post-investment action plans, use in monitoring the company’s progress and reporting for LPs, and to effectively convey the company’s strategic value on exit.
2. The Hold Period: The median hold period for a PE-owned portfolio company is 4.5 years. ESG issues can play out during the typical hold period and may influence the success of the company in its next period of ownership. Strategic corporate buyers who are subject to increasing ESG disclosure requirements from regulators and exchanges may focus on these factors.
3. Reporting: The ILPA Roadmap advises that GPs need to adopt “a framework to measure, audit and report on the impacts achieved by the fund.” The PortCo Template includes SASB as an ESG standard-industry classification to describe material ESG issues.

I hope you found this interesting. As usual, if there is anything we can help you with, please reach out. We will be happy to discuss any of these topics at length if there is more interest.

Best,

Marimar

Partner, Miranda ESG