Five tips on how best to engage investors on ESG

Hundreds of private equity (PE) firms face an April deadline to report against the PRI (Principles for Responsible Investment). It’s a good time then to consider how PE can best engage with their investor base on ESG (environmental, social and governance) factors when raising funds or communicating about their portfolios.

The temptation is to report lots of ESG data about the portfolio – as several big PE firms do – but this requires significant internal systems at firm and portfolio company level. For smaller PE firms and the small to mid-cap companies, it can be difficult to identify meaningful cross-sector data where the portfolio is small and diverse.

So what advice should PE firms follow when speaking with current and potential investors? Or when trying to communicate their ESG commitment and credentials to a wider audience? We have five  main suggestions:

Articulate ESG in terms of what your firm stands for, its development and its investment strategy

Most PE firms believe that they offer a mix of talents, disciplines and process that separate them from many other PE firms and try to articulate this difference; their approach to ESG should try to do the same. The narrative for your investments should show how you typically enhance a portfolio’s company approach to ESG. This could be a combination of applying a certain set of requirements (e.g. ensuring that there is a comprehensive set of robust policies and systems). Or even by directly assisting on ESG programmes (e.g. providing technical support to deliver a green energy programme.)

Be clear about how you view and use ESG

For some PE firms, ESG is primarily an important discipline. It enables better quality due diligence, investment decisions and portfolio management. It may not be the animating force that it is in some firms – where the emphasis is on the values and purpose associated with responsible investment or impact investing – but such an approach is legitimate.  But if ESG is primarily a matter of applying a set of tools, then it is important to demonstrate what tools you apply, how and why.

Indicate where you have used ESG to add value to a portfolio companies

These examples should also be material – with significant impacts on the business and its stakeholders. Such as how a drive to reduce emissions delivered lower energy costs. Or how enhanced worker benefits reduced the costs associated with staff turnover. Good governance examples can include reference to ESG risks and opportunities identified through the formalisation of ESG board responsibilities. And, additionally, the incorporation of ESG into risk registers.

Demonstrate ESG as part of your value creation story

A wider story of how you create and add value, how you identify and mitigate risks, spot and develop opportunities. ESG is becoming a bigger force within the investment community. There is a lot of emphasis on integration into systems and decision-making. That emphasis on integration should extend to how you think and communicate about ESG

Provide evidence of integration

Investors are not just looking for evidence of intent and strategy. They also want to see clear evidence that ESG has been systematically integrated at firm and portfolio levels. Evidence of some portfolio-wide KPIs and some ESG initiatives in portfolio companies is not sufficient; evidence that ESG is integrated into company governance and management systems makes a far stronger case.

For more information on how GK can help engagement with investors and other audiences on ESG, please take a look at our ESG services page or contact Martin Summers – martin@gkstrategy.com

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