14 Oct 2022

The Next Generation of ESG – opportunities await

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Effective portfolio engagement to maximise ESG value-creation potential

It was pleasing to see that ESG was a highlight in practically every session throughout the day at the BVCA Summit 2022, demonstrating its ongoing importance and relevance to private markets. Recurring themes centred on the value creating potential of private capital when implemented effectively and with a focus on material ESG risks and opportunities. Effective portfolio engagement is key to this, and it was recognised that the private market model has the advantage of freedom to achieve change at pace, and preserve and enhance the value of the assets private capital invests in.

The GP speakers on the panel, discussed their real-world approaches to engagement with their portfolio companies around the necessity for strong ESG credentials and commitments. It was noted that this could occur from a top down or bottom-up approach, but speakers highlighted that building trust with your portfolio company and implementing a collaborative environment was imperative to ensure its effectiveness. The ESG narrative with the portfolio company needs to focus on the areas where they have ‘the ability to effect real change’ said Adam Black from Coller Capital, highlighting the need for it to be materiality based. This prioritisation point was raised by all on the panel, especially where resourced dedicated to delivering the roadmap for ESG improvement is limited.

It was further recognised during the session that there is no such thing as ‘an ESG expert’ and that ESG can become very technical, very quickly. This is partly due to the relatively new emergence of the subject matter and the constantly evolving space within which it operates. Recognition of this, as well as the strategic insight and appreciation of risk awareness a GP team can bring reinforced the imperative of meaningful relationships between funding firms and their portfolio management teams and the value that can be created if done effectively. Proactive collaboration and frequent knowledge share, via initiatives such as ‘ESG portfolio company days’ was discussed as ways to enable effective engagement.
 


Key takeout: The truly unique opportunity GPs have as part of their business models is to inject and drive real meaningful change and impact within the companies they invest in IF they remain focussed on materiality and commit to developing an environment of trust and regular dialogue with their portfolio companies. Start the ambition now, even if it is small steps. Despite the cliche, ESG is a journey! Do not ignore the criticality of building ESG credentials with solid plans and embedding it into the investment process in a visible way to maximise ESG value creation potential.
 


Climate frameworks and disclosures: The roadmap to sustainable investing and Net Zero

The theme of this Climate Change focused session was to discuss the impacts the current geopolitical and economic challenges were having on companies’ Net Zero goals and to highlight the sectors’ role in achieving these. It was apparent from the offset that whilst the current macro-economic climate was seen as challenging, particularly for smaller businesses, we should not let the short-term head winds distract the longer-term opportunities the transition to Net Zero presents for the sector. Private capital plays a critical role in the Net Zero transition by investing in cutting edge companies who are developing affordable and scalable climate technology solutions, helping businesses to transition, and removing the cost and resource constraints smaller businesses may face.

Whilst there are returns to be made as we decarbonise the western world, the session also brought into focus the critical need to support developing countries, as there is ‘no roadmap to Net Zero unless we help developing counties develop in a green manner’ said Yalin Karadogan from LeapFrog Investments. ‘There are 3 billion people wanting to join the developed world, have lighting, refrigerators, these are good development goals, but we can’t make the same mistakes by building coal fire plants’, said Yalin Karadogan, emphasising the increasing need and opportunities for impact investors to play their part in helping developing countries transition and leapfrog the mistakes the western world has made.

Finally, the panel touched on how the changing and increasing regulatory framework is supporting with the transition and the associated risks. Kevin Bourne from S&P Global said that ‘the low carbon economy and the government’s involvement in this is already taking place’ highlighting the far-reaching impacts of this type of legislation and the impacts on business operating models. Kevin Bourne used the UK governments change to its procurement policy and the requirement for all their suppliers, where the contract value is worth more than £5 million, to have a published carbon reduction plan. These developments amplify the impact climate related standards are having at all levels.

Whilst legislation is seen as an essential tool to transition to a low carbon economy and reach our global Net Zero goals, policy makers and regulators need to commit to supporting the developing world to transition and focus on actual implementation and financing deals. This will have real-world decarbonising impact. Private markets play an essential role in this. Furthermore standardisation of ESG terminology, such as what constitutes a sustainable investment is also needed to help prevent ‘green and impact washing claims’ and to ensure that capital can be raised to support with this transition.
 


Key takeout: Policy and regulation needs to be implemented in a way that supports the transition on a global scale, supporting developing countries at the same rate as developed ones; and not create legislative barriers that could delay or inhibit the urgency of meeting Net Zero targets.
 


ESG risks, opportunities, and impact

ESG is often perceived as a tool to help identify and mitigate risk and identify opportunities. As we enter a period of greater volatility, the relevance of ESG and its ability for value creation is more pronounced. This relies on ESG being embedded at the heart of the company, focused on material themes relevant to the funds and portfolio companies and effectively communicated to demonstrate performance to relevant stakeholders.

As the ESG agenda continues to evolve and standardise, companies are in a better position to communicate their ESG performance. This remains a key element of any well-developed ESG strategy as it helps to build trust with stakeholders and offers companies the opportunity to differentiate themselves. Two terms which are often used to communicate this are ‘ESG’ and ‘Impact’. However, the terms are often used without distinction, causing confusion and can be ‘the root cause of unintentional greenwashing’ said Andrew Noble from Par Equity. Andrew Noon said, ‘Impact is more about the climate tech and investment into products and services that have some real social or environmental benefit and ESG is more of an operational toolkit that can be applied to any business. As ESG terminology evolves and more companies disclose their ESG performance, the need to standardise and decouple these terms is going to be critical to ensure we can communicate them appropriately and dampen down the claims of ‘green and impact washing’.

Another key element of any truly value creating ESG strategy is to ensure that we measure, monitor, and communicate our ESG performance or Impact of material risks and opportunities relevant to our company. Critical to this is to ensure that we are collecting data and communicating performance on ESG risks and opportunities that are material to the business, ‘we can’t solve every single issue with every single SDG’ said Zoë VanderWolk, ETF Partners. There is currently an increasing trend to collect or ask for more data and the absence of data can impact benchmark performance in a non-meaningful way, limiting the value of the benchmarks. Whilst the benchmarks and frameworks are good for standardisation and ongoing reporting ‘we need to make sure that we remain focused on collecting data and recording performance on the areas where a meaningful impact and opportunity can be achieved.
 


Key takeout: As more businesses identify the value in ESG we need to move to a period of convergence unification and alignment in terms of how we ask for, manage, monitor, disclose and communicate our ESG performance and Impact, to prevent ESG becoming a tick box exercise again and ensure it continues to remain a value creation tool.
 


Harriet Assem
Head of Sustainability, BVCA

 


Further insights from the BVCA Summit

 

BVCA ESG-focused training courses

The BVCA offers introductory and strategic-level ESG-focused courses via classroom and digital learning to support the industry as committed responsible investors.

We are pleased to announce the latest course in the BVCA Training ESG training series, following on from our ESG strategy course. ‘Carbon Reduction Planning for Your Portfolio’ will examine where Climate Change fits into a company’s ESG strategy. Industry experts will advise on the steps which need to be taken to quantify your organisation’s climate impact by calculating the carbon footprint and providing guidance on how to develop and deliver a carbon reduction plan. Find out more using the button below.

View all BVCA ESG training courses


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