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Explore Learning & Graphite Capital ESG during
the hold period

The hold period

The actions required to manage ESG issues during ownership will vary depending on whether the portfolio company is a pre-existing asset, or newly acquired. Nevertheless management steps do share common elements, as shown in the diagram below.

Please click on the different steps to learn more about them.



New Investment – Step 1: Validate ESG risks and opportunities


  • Follow up on ESG risks or opportunities identified in pre-acquisition due diligence reports to

    1. Validate the scale of a perceived ESG risk and the likelihood of it occurring
    2. Validate the size of potential opportunities

  • Assess whether there are any information gaps remaining from the due diligence process. Work with portfolio company management and/or your external advisers to close out ESG issues identified at due diligence.

  • Through discussions with management representatives, evaluate and quantify costs and benefits and prioritise risks and opportunities.

Existing Investment – Step 1: High level review


In order to establish a baseline, conduct a high-level review of the whole portfolio through surveys, management interviews or a review of available information to determine:

  1. How ESG issues relate to each company;
  2. Which high ESG risk/opportunity companies to focus resources on;
  3. Management attitudes and actions on ESG issues;
  4. Areas of unmanaged risks;
  5. Areas of unrealised opportunity; and

On the basis of the above, select which companies to focus the attention on first.

Note that sometimes the smaller investments or the seemingly innocuous might hold the bigger risks. To appropriately identify and be in a position to mitigate these risks, consider seeking help from external specialists.

New Investment – Step 2: Implement preferred solutions


  • Implement preferred solutions as part of portfolio action plans. Where there are critical and material risks, these actions and solutions may form part of the 100 or 180 day plan.

  • Involve portfolio company and ESG specialists, where relevant, and nominate a dedicated point person for ESG issues within the GP to ensure effectiveness.

  • As far as practicable, integrate with other initiatives (e.g. financial, change in management) being implemented at this very early stage.

Existing Investment – Step 2: Deep dive review


  • Once key ESG risks and opportunities have been identified in the portfolio follow on work should take into account: (i) the views of the deal team as regards exit type and timing (see Exit section) and (ii) focusing more in depth reviews of companies with the highest risk and opportunity profile. These reviews could include ESG site visits, discussions with management and board members and review of ESG information.

  • Don’t forget that a “buy and build” strategy will impact upon ESG considerations. Potential bolt-on acquisitions may impact the ESG profile of an existing portfolio company (e.g. what was not identified as being an ESG issue of concern during initial due diligence may become an issue of concern following a bolt-on acquisition or merger).

All Investments – Step 3: Determine strategy and policy / Establish governance arrangements


At portfolio company level, and in collaboration with management:

  • Determine portfolio company ESG/sustainability strategy aligned with house strategy

  • Develop a sustainability/ESG/corporate social responsibility policy

  • Allocate responsibility for managing ESG issues to designated personnel (both at company and within the deal team at GP level) and secure board level sponsorship of the ESG/sustainability strategy

  • Consider capital expenditure budget requirements, in collaboration with management. In order to maximise results, integrate ESG issues into the way the company operates and is governed.

All Investments – Step 4: Identify material ESG impacts and set KPIs


  • Identify what ESG impacts need measuring and managing and establish a limited number of Key Performance Indicators (KPIs) covering the full ESG agenda. Then collect baseline data on each of these KPIs, and eventually set targets and improvement programmes.

  • All portfolio companies are different, therefore their material ESG issues will also differ. Whilst recognising that there may be a need for some core KPIs across all portfolio companies (depending on LP interest and GP approach) try to ensure that portfolio company ESG KPIs are tailored and applicable to each investment. The selection of bespoke KPIs should be based on what is material to each company. Some examples of core KPIs are provided below:


  • There is increasing appetite amongst the LP community to further scrutinise monitoring processes within GPs and their portfolios, therefore a comprehensive and justifiable approach to ESG monitoring would assist in satisfying LP requirements.

Existing Investment – Step 5: Institute ESG performance monitoring arrangements


  • Design and implement an ESG performance monitoring programme, building-on the chosen KPIs and integrating it into existing board reporting systems if possible.

  • In recent years, a number of tools have been developed to aid reporting, including bespoke in-house tools and templates and systems developed by Private Equity software providers. Whichever route is selected, ensure consistency in reporting.

  • Where ESG performance is off track, take action to understand and remedy the situation.

All Investments: Step 6 – Report progress


  • Report ESG performance improvements (and if possible, the value added) internally, to investors and publicly.

  • Detailed ESG reporting should be owned by the portfolio company and will form part of their management process, even after the GP has exited the investment.

LEARN MORE ON REPORTING

Top tips

SECRET TO MAKING THE MOST OUT OF ESG DURING THE HOLD PERIOD

  • In line with your RI strategy, decide at the outset what your aim: compliance, value creation or strategic advantage? This will have an impact on your approach to ESG during the hold period. Learn more on setting up a RI strategy.

  • As soon as reasonably practicable after signing, engage with portfolio management to ensure ESG matters form part of the strategy and improvement process moving forward.

  • Although initiatives may differ between portfolio companies, ensure the approach is consistent across the portfolio.

Case study: Graphite Capital

Graphite Capital

A case study on making the most out of ESG during the hold period.

VIEW CASE STUDY

 

88%

agreed that responsible investment adds financial value in private equity.

Source: PwC Global Private Equity LP Dialogue 2015 (no. responses 60)



ESG issues included in the transformational plan

regularly include ESG issues in the 100 or 180-day transformational plan, immediately following acquisition.

Source: PwC Global PE Responsible Investment Survey 2016