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ESG.

Environmental, Social and Governance

Why is ESG important for Private Equity?

Multiple forces are driving the importance of ESG with significant pressure for private equity firms to adopt higher standards and reporting.   Public opinion of private equity as corporate investors with sole interest on increasing value regardless of the collateral damage to the pressure on private equity from the LP’s to provide robust, cross-portfolio ESG reporting throughout the investment period is resulting in scrutiny on ESG performance.  In addition to the external pressures, research indicates that ESG performance has a direct impact on revenue and costs and how companies manage ESG issues ties to overall performance.   And whether the exit is an IPO, to a strategic or another fund, ESG performance drives value maximization. 

Key Considerations:

External stakeholders are requiring robust, relevant information from the private equity firm for each portfolio company
Monetizing ESG activities requires comprehensive data from the portfolio companies
More investors are interested in the ESG activities of private equity firms including reports on ESG issues throughout the life of a fund, not merely at fund-raising
Investors may restrict access to capital as a result of a weak ESG program, insufficient reporting, or poor ESG performance
The variables in requests from investors may be time-consuming to respond to
Investors and the public rely on 3rd party; unbiased expertise

VALUE MAXIMIZATION

Key Components.

1. Strategy

  • Fund Level ​
  • Cross Portfolio

2. Policy

  • What components are important to the policy / sample policy

3.Procedure

  1. Development of internal procedures to address key components

4. Tools

  1. Evaluation and implementation of 3rd party and custom tools

5. Training

  1. Creation and implementation of training plan for critical areas identified in strategy 

6. Reporting

  • Structure, criteria and what to report
  • Reporting up from the portfolio companies to private equity firm, and them from the private equity firm to a range of stakeholders. 
  • Reporting out to investors, Principles for Responsible Investment (PRI), Public and other stakeholders
  • Develop reporting package for investor meetings

7. Assurance

  • Certification of reporting to give investors additional comfort & confidence in the data;  unbiased 3rd party reporting
  • Creates environment of transparency with investors and public
  • If portfolio company has potential future IPO, foundation for public offering and on-going public reporting is established

Our Process.

Develop ESG Plan

  • Sign PRI?
  • Develop Policy
  • What elements - D&I, ESG, etc.
  • One size doesn't fit all
  • How to address during DD
  • How to address with portcos

Implement​

  • Roll-out to portfolio
  • Assessment
  • Customized ESG program (industry, size specific)

Monitor & Report

  • Quarterly and annual reporting at portco and rolled up
  • Report on key progress and improvement areas

Assessment

  • Assessment of current state of program, monitoring and reporting
  • Provide cross portfolio level rating of current state (A to F, 1 to 5, align with credit rate scoring)
  • Determine  key objectives, requirements for program and timeframe
​       •    For example, is objective to move from a Score of 1 to a 3

Assessment available during due diligence as well

Execution

​Develop ESG Plan
One size does not fit all;  each portfolio company will have different strategy, policy, and KPI’s
  • Create the strategy
  • Develop the policy
  • Develop tools and templates for collecting the data at the portfolio companies for efficient reporting to the private equity fund and stakeholders
  • Develop the monitoring & reporting requirements including PE-level and portfolio company level KPI’s
  • Interpret data, score the portfolio company and score at the fund level
  • Assess the risks and opportunities and make recommendations for improvement

Implement
Roll-out customized program at portfolio companies (industry, size specific)
  • Procedures
  • Tools 
  • Training

Monitor & Report
PRI -  Do we need to manage the reporting to PRI?
  • Manage reporting with custom PRI reporting framework, establish the reporting modules applicable to your firm
  • Evaluate report to determine gaps in program and create plan to address the gaps