30 big ideas shaping ESG

The editorial team at our affiliate title Private Equity International have been on something of a voyage of discovery in responsible investing over the past year. Last July, they set out on a search to find inspirational examples of innovation in ESG and impact investing.

They asked for submissions for a new listing of private equity’s top innovators in ESG and impact investing and were blown away by the response. There were nearly 130 submissions: not just from the mega firms and multi-billion-dollar asset managers, but also from niche managers and impact investors that prove that you don’t need to be a big name to make a difference.

The idea was simple enough: with the world gripped by the covid-19 pandemic and the Black Lives Matter protests, they wanted to uncover examples that showed that the private equity world really could innovate in areas such as diversity,
inclusion, social responsibility and the environment.

We make no apology for the diversity of the initiatives highlighted here – that was exactly what they hoped to discover – nor the large number: the original aim was to feature just one entry per category but such was the standard that we ended up detailing 30 separate projects, ranging from women’s empowerment funds in Africa to ESG-backed subscription lines from some of the world’s top private
equity firms.

The common factor is that all the initiatives show originality and a scale of ambition that suggests that private equity has the vision – and the tools at its disposal – to tackle some of the world’s most intractable problems.

Finance

The debt fund that pays for ESG projects

Bregal Investments

The challenge: Making ESG-related improvements requires early investment of additional capital, but realization of the benefits takes years.

The approach: Bregal launched the €40 million Bregal Sustainable Development Fund, which lends to the firm’s portfolio companies to support investments in ESG projects aligned with the UN Sustainable Development Goals. Loans are tailored to the capital structure and equity arrangements of the business and with its existing financing and governance structures in mind. Intended to catalyze ESG improvements, the initiative offers a new level of financial support to businesses undergoing an ESG transformation without jeopardizing returns.

Bregal says: “The SD Fund is a unique initiative to provide tangible support to our portfolio companies in a way that helps accelerate ESG initiatives without jeopardizing the fund’s returns.”

We say: An innovative attempt to provide the financing required to support ESG initiatives.

ESG-linked leveraged debt deals

The Carlyle Group

The challenge: How to build incentives into loans to encourage better ESG.

The approach: Carlyle linked sponsor-backed financing and institutional loans directly to ESG improvements with two European deals in 2020. At Jeanologia, which creates clean tech to manufacture denim, the GP linked a margin ratchet feature in the commercial bank financing to the amount of water the business was able to save. At Logoplaste, a rigid plastics packaging producer, Carlyle negotiated an amendment to its existing €570 million financing to link the interest rate to the business’s ability to meet its carbon dioxide savings target.

Lenders say: “This is a situation where finance and sustainability come intrinsically together. It’s a win-win for everybody.”

We say: These early ESG-linked deals are a glimpse of the future.

The ESG-backed finance facility

EQT advised by Debevoise & Plimpton

The challenge: How to integrate ESG-related terms into fund finance.

The approach: EQT’s €2.3 billion subscription line facility advised on by Debevoise & Plimpton and launched in June 2020 has an inbuilt ESG performance-linked pricing mechanism, which adjusts its margin in line with sustainability outcomes. The facility services the GP’s current flagship vehicle and has an upper limit of €5 billion. Backed by a syndicate of 17 lenders, it is intended to encourage portfolio companies to implement specific ESG improvements and meet measurable targets.

EQT says: The facility incentivizes portfolio company improvements in “systemically important ESG areas, thereby further aligning interests and encouraging the development of more sustainable and future-proof businesses and returns”.

We say: The financing structure is powering a nascent transformation underway in fund financing.

A fund to tackle covid-19 stress

Vital Capital Investments

The challenge: How to help covid-hit companies in emerging markets where state support is lacking.

The approach: In March 2020, the impact investor launched the Vital Impact Relief Facility to provide affordable debt financing in sub-Saharan Africa to businesses facing working capital constraints triggered by the coronavirus pandemic. To be eligible, businesses needed to show that impact objectives met with the firm’s own priorities aligned with the UN Sustainable Development Goals. At least a quarter of staff needed to be women, preferably half.

Vital Capital says: “Rather than invest in large equity deals, which take years to build and scale (which is Vital’s typical strategy), we quickly realized the immediate need to help existing companies and jobs, so they could continue to provide goods and services in key development sectors, undisrupted.”

We say: A trailblazing fund that seeks to bridge the gap between local need and multilateral/government focus in a time of crisis.

Measurement

The Actis Impact Score

Actis

The challenge: Creating a common framework that helps managers track impact.

The approach: The Actis Impact Score is an open-source framework, which applies the impact measurement and management principles established by the World Bank’s International Finance Corporation and the Impact Management Project. The score is available to other asset managers, promoting peer-to-peer collaboration and the evolution of a would-be game-changing universal industry standard.

Actis says: “Rooted in the UN SDGs, AIS provides a framework to target and measure environmental and social impact through verifiable metrics.”

We say: Being able to demonstrate tangible impact is the holy grail of responsible investing.

Linking ESG to financial value

Eurazeo

The challenge: Tracking the financial value of ESG improvements.

The approach: The Paris-based firm has applied a methodology that defines core KPIs and associated costs, as well as specific operational indicators relevant to a business (eg, kilowatts used per kilogram of laundry washed), which, when combined, map performance. The result? A clear demonstration of the relationship between improved ESG, cost reductions and savings, and increased management support for new initiatives.

Eurazeo says: “The main reason for launching this project was to demonstrate the financial value created by CSR policies and their contribution to a responsible and long-term value creation.”

We say: A useful demonstration of how ESG contributes to value creation.

Standardising impact measurement

The IMP+ACT Alliance

The challenge: How to assess impact without being swayed by subjective judgments.

The approach: The IMP+ACT Classification system is a digital tool that enables asset managers globally, including private equity firms, to report their ESG and impact management practices in a standardized format and to classify investment impacts. Developed by over 150 asset managers and organizations, including Deutsche Bank, Bridges Fund Management and Nuveen (which applied the methodology to its global impact strategy), the scheme is truly industry wide.

Nuveen says: “The initiative helped by advancing the goal of fostering transparency among asset managers regarding the variety of impact measurement approaches and rating techniques that they use.”

We say: The wide range of participants suggests this has scope to change the impact landscape.

Tracking Australian farm emissions

Macquarie Infrastructure and Real Assets

The challenge: Reducing emissions in agriculture, which accounts for 13 percent of Australia’s emissions.

The approach: FarmPrint, developed by Australia’s Energy, Emissions and Efficiency Advisory Committee and backed by institutions including MIRA, allows Australian farmers undertaking large-scale cropping to measure their emissions footprint both on-farm and in the supply chain (for the farm as a whole or per ton of output). Tailored to a specific segment, the method allows those farmers to benchmark their performance against their peers and to assess the impact of alternative farming methods on emissions.

MIRA says: “Without a robust measurement tool, it is difficult for farmers to determine what they can do to improve.”

We say: A vital initiative in a critical area.

Calculating the financial impact of ESG

Triton Partners

The challenge: How to estimate the financial value of ESG initiatives.

The approach: Using proprietary methodology, the GP has expanded its ESG KPI annual portfolio company reporting to include estimates on the financial value of ESG initiatives. The exercise provides a clear indication of where the GP can offer further support and resources. It also makes clear the business case for taking action. By showing the financial implications of ESG initiatives, Triton says the revised ESG KPI reporting process has changed the way the firm interacts with its portfolio companies and renewed the ESG conversation within the firm.

Triton says: “We believe we are one of the first PE firms to estimate financial value in this way across a portfolio.”

We say: The exercise provides supporting evidence for the belief that better ESG practices create financial value.

Diversity

Mentoring diverse leaders in Africa

Actis

The challenge: Providing effective mentorship to high-performing women and minority groups in emerging markets.

The approach: The growth investor’s scheme, launched to encourage more diverse talent, matches high-performing, high-potential, female portfolio company employees, as well as individuals from minority groups in Africa with senior members of the firm’s own team. These include board members, senior advisors and other portfolio company management. To date, all mentees in the 18 mentoring pairs are African, more than half are female and they represent a range of nationalities.

Actis says: “Academic research and professional studies indicate that mentoring can be a powerful tool for professional development.”

We say: Feedback demonstrates both mentee and mentors are learning a huge amount from the relationship.

Investing with a gender lens

Development Partners International

The challenge: How to enhance women’s empowerment and economic participation in emerging markets.

The approach: With a gender-balanced team, the African investor already has a track record in tackling the diversity deficit that plagues the industry. With its third flagship vehicle it is extending this commitment into new territory. African Development Partners III has been designated the first 2X Flagship Fund in an initiative backed by development finance institutions such as CDC, the European Investment Bank and FinDev Canada. In line with the goals of the 2X Challenge to promote investment in projects that enhance women’s empowerment, DPI will integrate gender considerations into all stages of the investment process to pursue gender smart interventions, increasing the number of women represented at all levels of the portfolio companies.

DPI says: “ADP III is the first 2X Flagship Fund committed to investing with a gender lens.”

We say: As the first fund to align with this new initiative, DPI demonstrates a pioneering combination of ambition and leadership.

The Women’s Economic Empowerment Fund

SEAF

The challenge: How to champion women-led businesses in South-East Asia.

The approach: The emerging market growth investor launched the SEAF $100 million Women’s Economic Empowerment Fund with the goal of improving the living standards of women and their families in South-East Asia. The fund champions gender equality through economic empowerment and the investment of capital, not just in female-owned and led businesses but also women dominated sectors and products. A central pillar is the investor’s Gender Equality Scorecard, which it uses to screen investments and assess portfolio company performance around gender parity.

SEAF says: “The key innovation lies in executing on the premise that women-focused investing is vital to economic and societal development, particularly in emerging markets.”

We say: Following on the heels of the 2017 SEAF Women’s Opportunity Fund, its latest vehicle shows continued ambition to affect real change.

A 50/50 deal team gender balance

WestRiver Group

The challenge: Creating a gender-balanced leadership team.

The approach: At the Seattle-based VC firm, a gender-balanced leadership team is knitted into the fabric of the firm and regarded as a clear a route to generate superior returns. The investment team’s 50-50 structure ensures individuals bear equal responsibility across similar roles; carry and upside is distributed equally across genders; and that everyone shares equal voting rights serving on one investment committee. If one partner leaves, the firm is obliged to find a partner of the same gender.

WestRiver says: “Multiple studies have shown over the past decade that gender-balanced teams perform better.”

We say: By explicitly linking gender parity at the leadership level to financial performance, the firm sits at the vanguard of industry change in attitude and behavior. That half of its female partners are women of color cements this lead.

Due diligence

Diligencing target company ethics

Investindustrial

The challenge: How to put ethical considerations at the heart of ESG.

The approach: While conducting ESG due diligence on a target investment has become commonplace, the UK-based GP has gone a step further to create a proprietary methodology to spotlight potential ethical, integrity and reputational issues. Using metrics and other tools to collect ethics and culture data, this information is presented to the investment committee as part of initial and final investment recommendations. The evaluation considers seven separate metrics: transparency, integrity track record, respect, inclusion and fairness, ethical role modelling, policies and incentives.

Investindustrial says: “Not only is a strong focus on business integrity likely to reduce the costs of misconduct, but it can afford companies a solid corporate reputation, genuine employee engagement, robust governance and even increased profitability.”

We say: The firm is one step ahead in recognizing the impact culture and internal business ethics can have on financial performance.

Vetting how portfolio companies act

Wafra

The challenge: A diligence process that aligns LPs and GPs on ESG.

The approach: There is power in collaboration. The Constellation Platform is an initiative to invest in alternative investment firms backed by advisor Wafra, the Alaska Permanent Fund Corporation, RPMI Railpen and the Public Institution for Social Security of Kuwait. At its core is a mission to educate, train and support portfolio companies on the integration of sector-specific ESG frameworks by applying proprietary ESG due diligence methodology. Drawing on the platform LPs’ ESG priorities, values and vision, Wafra works closely with investee asset management businesses to accelerate the adoption of ESG best practice.

Wafra says: “Robust ESG diligence must also include thorough vetting of the way portfolio companies select, manage and direct their own underlying investments.”

We say: A good example of how collaboration can improve the diligence process.

Social responsibility

The hiring platform for military veterans

Apollo Global Management

The challenge: Providing jobs to the huge numbers of unemployed veterans.

The approach: Built in partnership with Apollo portfolio company CareerBuilder, the GP launched the Apollo Veterans Talent Network in 2019. The AVTN website matches job seekers’ military skills to the particular staffing needs of employers across Apollo companies. Displaying more than 8,000 job openings and enabling veterans looking for employment to search for them using military classifications and codes, the site seeks to combat high levels of joblessness among this group, where more than 60 percent of the unemployed are between the ages of 18 and 54.

Apollo says: “Apollo is the first private equity firm to utilise technology to build a veteran talent pipeline.”

We say: The initiative shows the power of targeted technological innovation to meet a defined social need.

The SHE policy cutting accident rates

Blue Wolf Capital

The challenge: Reducing accident rates for employees.

The approach: Revolutionising entrenched working environments and behaviours is not easy. The US manager has done just that with its Safety, Health and Environmental policy, which stipulates clearly its expectations and responsibilities for the 51,000 individuals employed by its portfolio companies. Why is this innovative? The firm’s metrics-based approach that reports to board level has laid the foundation for a new shared working culture that prioritises high-performing, results-focused teams and has slashed OSHA Recordable Incident Rates and Lost Time Accidents.

Blue Wolf says: “In the past four years, Occupational Safety and Health Administration recordables and lost time accidents have been reduced 40 percent and 47 percent respectively.”

We say: The policy makes explicit that investing in human capital is as important as financial growth.

Partners Group employee fund

Partners Group

The challenge: Providing benefit plans for employees.

The approach: Employee profit-share plans were already germinating at the Swiss asset manager. Covid-19 has accelerated them. Through the launch of its SFr10 million ($11 million; €9 million) Portfolio Employee Support Fund (into which the firm’s employees, senior executives, co-CEOs, executive chairman and founders all contributed), the GP is providing financial aid to employees whose health, income, expenses or families have been negatively affected by the virus. By Q3 2020, it had distributed close to $6 million, more than half directly to 10,000 portfolio company employees suffering the most hardship.

Partners Group says: “Partners Group is leveraging learnings from the Portfolio Employee Support Fund and using them as a foundation for our broader Stakeholder Benefits Fund.”

What we say: Offering a stopgap in a moment of unprecedented crisis, the initiative represents creativity and commitment.

Environment

A tool to calculate GHG emissions

Apollo Global Management

The challenge: Measuring greenhouse gas emissions is a complicated and often subjective task, made even more difficult at the portfolio level.

The approach: To get around the variety of competing models, factors and possible inputs to calculate its businesses’ Scope 1 and 2 GHG emissions, the US investor devised its own tool that uses the most recent factors for stationary and mobile fuel combustion, and heat and electricity consumption. The result is standardized portfolio company reporting that has boosted disclosure (which assists comparability), while encouraging businesses to devise their own emissions reduction schemes.

Apollo says: “This tool has increased portfolio company disclosure of GHG emissions and brought new levels of accuracy, consistency and comprehensiveness to reporting.”

We say: Provides welcome transparency in an area often muddied by competing approaches.

Climate modelling for secondaries

Coller Capital

The challenge: How to climate model in secondaries where funds are a step removed from the underlying company.

The approach: Coller has accelerated its efforts to address climate change by undertaking a rigorous, forward-looking climate scenario analysis (both physical and transition risk) on all active funds. The analysis was undertaken by climate scientists and environmental economists in close collaboration with Coller’s ESG team. Coller shared these analyses with the GPs, helping them to draw up action plans on ESG best practice, especially climate-related risks and opportunities.

Coller says: “We have sought to take the lead on climate action in our field by raising standards on what can be achieved in addressing climate risk.”

We say: Coller attempts to show that secondaries firms can wield impact on GP attitudes toward ESG.

Integrating future climate considerations

FSN Capital Partners

The challenge: How to ensure ESG gains are maintained post-exit.

The approach: The Norwegian investor’s Climate Action project, inspired by the Task Force on Climate-related Financial Disclosures, provides a standardized way to consider climate risk and opportunities across the investment lifecycle. But the approach differs in that it intends for companies to remain sustainable after the GP has exited. Critically, in addition to raising awareness of climate matters to the deal and management teams responsible for integrating climate-related risk mitigation into the strategy, the forward-looking methodology aims to install a business model resilient to different climate scenarios.

FSN says: “With help from external experts, portfolio companies now assess the robustness of their business models and full value chains under three different climate scenarios.”

We say: Exit strategy is a crucial part of the ESG equation.

An ESG filter for private debt

Kartesia

The challenge: How to bridge the ESG information gap between lenders and their portfolio.

The approach: Providing liquidity and credit to European SMEs, the Luxembourg-based financing specialist recognized a need to boost ESG reporting from its portfolio companies. In partnership with Sustainalytics, the firm has launched a project to annually map its companies’ carbon footprint – the results for high-emitting borrowers are discussed with them – and estimate the overall weighted carbon-intensity of each of the firm’s funds. The firm foresees extending its application to factoring in carbon emission data in pre-investment decisions.

Kartesia says: “Lenders are often not involved in discussions surrounding the carbon profile of a business being targeted by private equity sponsors, so relevant ESG data is not passed on.”

We say: This is an early-mover in a fast-growing market.

Parcel delivery carbon offsets

L Catterton

The challenge: The environmental impact from the growing number of parcel deliveries.

The approach: The Small Parcels Contract launched by L Catterton will offset carbon emissions for itself and its portfolio companies linked to the delivery of small parcels. Launched in summer 2020, it is expected to offset 9,000 tonnes of carbon emissions in its first year. As the firm owns more than 45 businesses in North America alone, the scheme has the potential for broad environmental impact across its portfolio. The contract has also prompted ESG conversations between the GP and its brands around topics such as packaging and supply chain management.

L Catterton says: “L Catterton sees this offset program as a small step towards a larger sustainability journey for both ourselves and our participating portfolio companies.”

We say: An important area for innovation.

A TCFD framework

Pantheon Ventures

The challenge: Encompassing the Task Force on Climate-related Financial Disclosure recommendations.

The approach: The Task Force on Climate-related Financial Disclosures has been instrumental in making financial services more aware of climate change risks. The European investor has taken the TCFD’s recommendations a step further toward implementation by producing a TCFD reporting framework that measures climate-related risks and opportunities in its infrastructure portfolios and shares information on its approach, including greenhouse gas emissions, with its clients. The next move is to use this framework to address the more complex task of measuring climate change risk in PE portfolios (in addition to existing GP due diligence reporting on the topic).

Pantheon says: “We have been an early mover in incorporating climate change decisions into our due diligence processes.”

We say: Has the potential to revolutionize climate reporting.

Governance

A corporate governance toolkit

Development Partners International

The challenge: Building good governance is a complicated task for managers operating across borders in markets where practices and regulations can differ vastly.

The approach: The African investor has tackled this challenge head on by devising a proprietary corporate governance toolkit that can be applied across its portfolio to improve board culture and behaviour, controls and processes, disclosure and transparency, and share/stakeholder practices. Including terms, templates and diagnostic questions, the toolkit offers a standardised and repeatable means to boost good governance, and is a basis for ongoing appraisal.

DPI says: “The toolkit allows LPs to follow a standardised format to corporate governance for existing and new portfolios, regardless of their territory or corporate governance system.”

We say: A practical approach to a difficult issue.

Aligning sustainability objectives with the portfolio

Ambienta

The challenge: How to ensure ESG is embedded in portfolio companies.

The approach: Ambienta’s award-winning ESG in Action programme guides ESG integration at the GP and portfolio level. The proprietary programme is based on five macro steps, which are applied consistently across all operations including investment analysis, decision-making processes and portfolio management. The Italian private equity investor measures the effects of the impact it creates on an annual basis and discloses the figures publicly.

Ambienta says: “The ESG milestones we achieve through our investments are purposefully designed to remain embedded in the organisations and represent an enduring legacy for our companies.”

We say: Demonstrates the value of a holistic approach.

An LP ESG Advisory Board

Energy Impact Partners

The challenge: Giving LPs a stake in ESG policies.

The approach: The US GP has formalised LP input into its ESG and impact priorities by establishing an ESG Advisory Board comprised of its inhouse ESG/impact specialists and leading impact institutions within its LP base. Recognising that traditional LPAC engagement on the topic was insufficient to meet shared climate and energy transition goals, the ESG board was launched to improve the quality, transparency, diversity and accuracy of methods and metrics the firm applies to its ESG programmes and impact reporting.

Energy Impact says: “The ESG Advisory Board serves to continuously improve the quality, transparency, comprehensiveness, and accuracy of methods and metrics EIP applies.”

We say: A deepening of GP/LP engagement around responsible and impact investing.

EQT’s statement of purpose

EQT

The challenge: Setting out a clear set of principles and responsibilities.

The approach: In March 2020, as part of its annual report, EQT published a Statement of Purpose that formally integrates its positive impact priorities into its articles of association. Targets include ensuring 65 percent of professionals recruited in 2020 are female, and that a quarter of independent board members at the portfolio company level and the same percentage of advisors should also be women. In addition all portfolio companies are to start a transition to using 100 percent renewable energy.

EQT says: “EQT’s overall approach is to lead by example and inspire both portfolio companies and others in the industry to follow suit.”

We say: The statement is a textbook example of how GPs should be clarifying their responsibilities.

Tech

The technology charter

Gaia Capital Partners

The challenge: How to provide a framework for sustainable investment in tech.

The approach: The French growth equity GP’s framework for sustainable investing in tech makes explicit the need to consider ethical, social, environmental, human rights and governance questions. The result is the Responsible Investment in Technology Charter, which includes metrics and guidelines governing tech impacts and potential improvements to business models and practices. The open-source tool, which can be used by both investors and companies, provides fresh momentum to changing behaviour within this sector.

Gaia Capital says: “We find that tech executives are particularly keen to address issues of responsible innovation.”

We say: A reminder that technology is a worthy area for ESG analysis.

Digital monitoring of employee wellbeing

Partners Group

The challenge: Increasing the wellbeing of staff working in remote locations.

The approach: The Swiss-based firm’s portfolio company USIC deploys 9,000 field technicians across the US, working largely alone in sometimes high-risk environments, to locate and maintain critical infrastructure. To better protect employees and boost job satisfaction, the business developed and integrated a software upgrade into its core field technology that allows supervisors to better track employees’ wellbeing through a simple check-in process. The software also optimises routing. The initiative eliminated over one-third of all motor vehicle accidents and the rate of injuries in the field fell by nearly 50 percent.

Partners Group says: “Partners Group is harnessing innovation to increase employee retention, protect employee health and safety, and reduce the company’s carbon emissions.”

We say: Absenteeism, working while ill and burnout are issues that any responsible employer needs to take seriously.