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Strategies for ESG management
The importance of sustainability for corporate governance and investments is steadily increasing. However, clearly defined introduction and implementation strategies are still lacking in parts of the private equity sector. An ESG Performance Monitoring Framework can help guide improvement measures both at the fund level and in portfolio companies.
TEXT Markus Gyssler and Marcus Höfer
More and more companies are integrating environmentally and socially responsible conduct into their corporate strategies as management-relevant objectives. For one thing, the inclusion of ESG (Environmental, Social, and Governance) criteria is now expected by society and government regulators; secondly, this approach offers measurable economic potential. Private equity funds in particular can benefit and should therefore pursue a comprehensive ESG strategy despite the associated costs.
However, introducing an holistic ESG investment strategy – including the uniform definition of ESG-conformant business objectives and the consistent monitoring of those objectives – entails a certain degree of complexity. Obstacles on the path to fund-wide ESG reporting include the availability and quality of data at the portfolio level and the entry, processing, and evaluation of this data. An at least partially automated ESG management platform is an indispensable prerequisite for portfolio companies because it allows them to map historical trends and conduct best-practice benchmarking. Emeram Capital Partners uses the ESG Performance Monitoring Framework from the management consulting firm Base Camp Management Consulting for this purpose. The following questions need to be answered before developing and implementing an ESG strategy:
- How can the fund’s ESG objectives be reconciled with the corporate strategy and corporate values?
- What’s the current implementation status of the ESG strategy?
- What’s required in order to achieve the adopted ESG objectives?
Definition of an ESG strategy
The Emeram Core Investment Principles served as the basis for defining the ESG strategy at the fund level. These internal guidelines on Environmental, Social, and Governance elements and rule-conformant investment conduct are based on the United Nations’ 17 Sustainable Development Goals.
In addition, introducing a fund-wide ESG reporting system was a necessary prerequisite for management and goal attainment. The reporting system makes it possible to identify and realize appreciation potential in the portfolio companies that aren’t immediately detectable. With the help of a regular ESG reporting system, investors can also be continuously informed about the ESG strategy and implementation successes in the portfolio companies.
Developing an ESG Performance Monitoring Framework
The technical and specialist requirements for ESG reporting were defined with the help of the ESG Performance Monitoring Framework:
- Developing a benchmark-based ESG rating that ensures comparability across the various sectors of the portfolio companies
- Monitoring the key indicators defined in the ESG rating, including the proportion of electricity consumption contributed by energy from renewable sources, employee diversity at the management level, and the implementation of explicit governance policies
- Implementing a standardized and automated software platform that minimizes the costs of data entry, processing, and evaluation both for the portfolio companies and for Emeram, and makes it possible to focus on interpreting the information and implementing measures on that basis
- Regular reporting of fund-wide ESG performance to investors
- Incentivizing the management teams of the portfolio companies based on ESG-relevant drivers
To implement the ESG Performance Monitoring Framework, Base Camp developed a business intelligence reporting system with the aid of an online tool. This solution harmonizes the portfolio companies’ different databases the so that all key indicators and their development can be presented, compared, and evaluated both at the company level and the fund level.
Improvement measures and long-term management
Using the ESG Performance Monitoring Framework, historically available data from the portfolio companies are first collected and integrated in a standardized process to allow for evaluation. In the next step, the sustainability goals are formulated using sector comparisons and coordinated between the management teams from the portfolio companies and the responsible investment teams. This allows improvement measures to be identified and initiatives devised, including:
- Environmental: Rapid conversion to remote work and replacement of air travel with train travel, with the goal of reducing the CO2 footprint
- Social: Establishment of a task force to promote employee diversity throughout the company and measure employee satisfaction
- Governance: Extension of the fund-wide guidelines for compliance and governance to the portfolio companies
The attainment of ESG objectives by each portfolio company can now be measured using the ESG rating, and ESG performance is monitored on a long-term basis.
ESG-conformant governance can be managed within the fund with the help of strategy development and the subsequent integration of the ESG Performance Monitoring Framework. This ensures that all companies in the portfolio will continuously improve their performance using relevant and measurable criteria. This benefits both the portfolio companies and the financial investor.