Materiality, Measurements & Millennials – Highlights from the Private Equity International (PEI) Responsible Investment Forum

During the last week of September there were several Environmental, Social and Governance (ESG) related events taking place in Berlin, and I was honoured to be invited to speak at two of them: the Private Equity International (PEI) Responsible Investment Forum and the ‘PRI in Person’ conference organised by the United Nations-supported Principles for Responsible Investment (UN-PRI*).

Both of these events were promoting responsible reward (*) and how to integrate ESG factors into pay structures.

The PEI event is in its 8th year and it ran for two days, attracting over 250 general partners, limited partners, and other private equity professionals.

There was a mix of individual speakers, expert panels and roundtable discussions, and this is where I was given the opportunity to explain what responsible reward is all about.

I and other specialists discussed the following topics:

1. The 17 UN Sustainable Development Goals (SDGs) and 169 associated targets.

Several examples of how firms are supporting the United Nations Sustainable Development Agenda by mapping out their business and investment strategy to the SDGs and targets were showcased.

Take away action points and considerations:

  • How does your organisation support the SDGs?
  • Have you developed a framework and implementation plan?

2. The fact that the ultimate goal of investors is the interest of their beneficiaries through long-term sustainable returns and at the point of exit.

Take away action points and considerations:

  • How do ESG factors affect your portfolio and how does your portfolio affect ESG?

3. The increasing demands on where and how capital is being invested from both direct and indirect investors, as they recognise the widely positive correlation between ESG and financial corporate performance.

A Private Equity team works closely with the management team of the companies they invest in and it should, in theory, be easier to include ESG in business strategy and day to day operations.

Take away action points and considerations:

  • Active ESG management mitigates risk and creates value and new opportunities. Yet the Private Equity sector is still behind in integrating ESG in investment decisions, why?

4. Should the responsible investment team should be separate from the deals’ team and comprise of experts who are effectively internal advisers? The alternative is to embed responsible investment across all teams within the firm as an integral part of the due diligence process when structuring any transaction.

Take away action points and considerations:

  • Which ESG path is your firm following?

5. The concept of Materiality.

By investing in hundreds or even thousands of companies, the consensus was that it was the general partner’s responsibility to define which criteria are material for each investment based on industry sector, geography and size of the firm.

The SASB Materiality map provides helpful guidance, although judgement must be applied alongside it. ESG risks change over time, cyber security and fake news being topical at the moment.

Take away action points and considerations:

– How do you determine which ESG factors are relevant to your investments during the due diligence process and throughout the ownership period?

6. How the investment industry is supporting the UN SDG #5 ‘Gender Equality’ and #10 ‘Reduced inequalities’.

As a Remuneration specialist, I was particularly interested in this topic, and we were reminded of our duties and responsibilities under the 2015 Modern Slavery Act in the UK for our own actions as well as our UK supply chain.

There are also a number of UK government initiatives currently taking place to address these two UN goals, for example the calculation of pay ratios, and gender and minority diversity and inclusion in senior positions and boards.

Another way to determine the effectiveness of compensation structures is through their impact on employee retention and job creation. Some investors track the number of jobs created, average compensation, and employee turnover in each of their portfolio companies. These are good indicators of the link between Compensation, Conduct and Culture, and ultimately corporate financial performance.

Take away action points and considerations:

– How does your firm support SDGs #5 and #10?

7. What gets measured, gets managed.

One of the resulting effects of greater attention to sustainable goals is an increase in reporting requests. This becomes a minefield, as reporting guidelines to ease the task and comparison across firms, geographies and sectors are not yet standardised.

We are all familiar with situations where measurement does not necessarily lead to better management and NIL reports are not always requested nor provided!

Take away action points and considerations:

– How have you standardised your reports and how do you use the data you have collected?

8. Lastly, the question of millennials came up again.

As a mother of two millennial sons, I recognise that we have to work harder to attract the younger generation to the finance sector – the sector which was the top choice when I started my banking career in the early 90s.

A sense of urgency, the desire for ongoing self-development and a need for purpose and fairness are their prime motivators. These all seem like ideal attributes to support the SDGs.

Take away action points and considerations:

– Are our children better ambassadors to the UN than we are?

If you wish to discuss how your company can address the above questions in more detail, please contact Corinne Carr, Responsible Reward Specialist at esg@peoplenet.ltd.uk or Contact Us.

Glossary from Investopedia:

Limited Partners

Limited partners are usually institutional or high net worth investors  interested  in  receiving  the  income  and capital  gains associated with investing in the private equity fund. Limited partners do not take part in the fund’s active management. They are protected from losses beyond their original investment as well as any legal actions taken against the fund.

General Partners

The general partners are responsible for managing the investments within the private equity fund. For their services, they earn a management fee and a percentage of the fund’s profits, called carried interest. The general partners can be legally liable for the actions of the fund.

(*) subject of other articles

September 2017