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ESG integration: from why to why not?

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ESG has gradually moved from the sidelines onto the main stage within private equity in the last few years. The key question now is - why not? Viviana Occhionorelli of Astorg Partners joined us for an exclusive interview on what has driven this change of perception. 

ESG funds now account for more than $30 trillion worldwide in assets under management. What in your opinion is driving this increase in social responsibility among the investment community?

There are several drivers here, including...

1. Pressure from investors. In particular, pension funds who account for over 20% of our capital base, are interested to know:

  • How Astorg engages portfolio companies on ESG issues
  • The methodology we use to assess ESG factors in our portfolio
  • The main ESG challenges facing our companies
  • The methodology used to report ESG factors to our investors
  • Our initiatives on issues such as climate change and diversity
  • How we assess positive impact in our portfolio

2. In Europe and particularly in France, private equity firms are very advanced on ESG aspects and policies – perhaps because France has more stringent regulations on environment, climate change (The French Law on the Energy Transition) and ESG disclosure. In Paris the investment association France Invest is active with its ESG and climate commissions and GPs collaborate on ESG initiatives, allowing for quicker learning and progress. A recent initiative from the French private equity community is the UN PRI-endorsed Initiative Climat International, of which Astorg is a signatory. This initiative pushes GPs to disclose the emissions of their portfolios and integrate climate risk into their due diligence process.

3. How ESG brings value to our companies.

  • ESG is not a reporting tool but rather an operational function. We engage our companies, learn about their processes and support them in integrating sustainability into these processes.
  • At Astorg, ESG represents a collaboration platform. At three ESG events per year, we gather our CEOs, ESG managers and investors to discuss best practices as a dedicated ESG community within our portfolio.
  • ESG does not just mean risk mitigation, but focuses on the positive impact our companies bring to the environment and society. This year for the first time we will report to our investors in connection to the UN’s Sustainable Development Goals (SDGs).

4. Regulation: The latest directive on sustainability-related disclosures in the financial services sector will push GPs to disclose more about their ESG processes.

What do you see as the key challenges of ESG integration?

One key challenge is showing the deal teams and LPs the value created by our ESG initiatives. This is not always easy to quantify (except perhaps CO2 emissions).

Further, a lack of standardisation of ESG reporting to investors means every LP asks the GP for different information about ESG activities, creating more work (and not necessarily additional value). The lack of a standard methodology limits firms’ ability to effectively assess positive impact or value creation through ESG.

Lastly, there is a shortage of expertise. Some larger companies have the resources to attract and support large numbers of ESG experts but the majority do not. The shortage of individuals qualified and suitably knowledgeable on ESG is leading to a lack of integration, widening gaps between firms and sectors. The solution could be introducing the concept of ESG to university courses on economics, accounting, finance and business.

What are the difficulties in identifying the materiality of ESG issues in the absence of a single set of global standards?

The difficulty is that the process of defining materiality for ESG issues becomes very subjective and can lead to discussions on whether one aspect is more relevant than another.

How can the private equity industry better align efforts to assess materiality?

The industry must work together to create a common standard methodology based on risk profile, geography, size and sector. On this we can learn from existing industry initiatives and sustainability ratings such as Ecovadis and Sustainalytics.

Is it possible – or desirable – to have a single set of global ESG standards?

ESG standards would help map different companies and portfolios against common ESG criteria and make it easier to compare best practices and portfolios, and to report results to LPs.

It is important to note that different industries will have different material ESG factors so having a clear framework that highlights these differences whilst standardising the methodology of quantifying ESG factors and reporting is highly desirable.

How meaningful are the UN’s Sustainable Development Goals for an investor?

The UN’s goals are important as they help to guide business decisions. They also present ESG from a risk point of view as well as aiming to establish a common standard for progress. Highlighting the positive impact is motivating for many of our companies given their environmentally friendly products and solutions which contribute to people’s health and well-being.

What is next for ESG investing?

Technology will be key – specifically finding the right digital tools to gather and optimise ever-growing volumes of ESG data. For example, pension funds like APG and PGGM are developing an AI-powered platform for investing in line with the SDGs.

ESG integration will become an increasingly important part of portfolio management. Years ago ESG was about gathering the relevant data from companies and reporting this on to investors. Today it is used as a platform to collaborate on specific processes – be it R&D or procurement – so the GP is becoming more actively involved in the management of the portfolio company.

Continued growth and development of material ESG KPIs for industry-specific investing will enable more relevant frameworks for investors and better alignment between private equity firms and their deal teams.

The next few years should see ESG shift into the major conversations in countries around the world as more and more global firms are encouraged and incentivised to deliver ESG integrated policies.

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Under the spotlight: Viviana Occhionorelli

Viviana joined Astorg in 2018. Before that she worked as Global Sustainability Manager at Barco and as European Environmental Manager at Sony Electronics. Viviana has an expertise in circular economy, eco-design and supply chain sustainability.

Viviana studied Sustainable Development at Imperial College London, she has a master in Environmental Technology from Oxford Brookes and an MBA from Vlerick Business School. 

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