PwC s'est entretenu avec 17 sociétés de capital-investissement, dont six figurent parmi les dix plus grandes sociétés mondiales de capital-investissement, 11 parmi les 50 plus grandes, et six parmi les sociétés de taille intermédiaire. 10 sociétés ont leur siège social en Europe et sept aux États-Unis. Sept des groupes sont signataires des Principes pour L'investissement Responsable de l'ONU. L'étude relève qu'un examen du processus de conformité pour les membres signataires des PRI était déjà en cours. Il est possible qu'à l'avenir une communication obligatoire soit exigée des signataires.
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Investissement responsable : la création de valeur à partir des enjeux environnementaux, sociaux et de gouvernance
1. www.pwc.com/sustainability
Responsible investment:
creating value from
environmental, social
and governance issues
Insight from our survey of
the private equity industry
March 2012
2. Contents
Section 1 – Executive Summary 2
Section 2 – Findings 5
2.1 Drivers for responsible investment activities 5
2.2 Internal capacity 7
2.3 Policies and procedures 8
2.4 Measuring value 11
2.5 External reporting 13
2.6 Looking ahead 15
Glossary of abbreviations
ESG: Environmental, social and governance
Generation Y: The group of people born in the 1980s and 1990s
GP: General Partner
LP: Limited Partner
PE: Private Equity
RI: Responsible Investment
UN PRI: United Nations Principles for Responsible Investment
3. About the survey
Based on our experience of working with clients from the private equity (PE) industry, we
have seen a notable rise in attention to responsible investment (RI) and the management
of environmental, social and governance (ESG) issues over the last few years. We have also
observed what seems to be an emerging common challenge – to demonstrate the value of
implementing a responsible investment strategy. Does managing ESG issues really help to create
value? And if so, how?
Our survey seeks to explore the PE industry’s response to this question. We also examine what
drives PE houses to focus on responsible investment, and how they are tackling the challenge of
valuing and measuring their efforts. And we look ahead, asking how the industry’s commitment
to addressing ESG risks and opportunities might evolve over the next five years.
This report summarises the results of our survey and presents our view on the key issues arising.
What is responsible investment?
Responsible investment is an investment approach founded on the view that the effective
management of environmental, social and governance (ESG) issues is not only the right thing to
do, but is also fundamental to creating value. Responsible investors believe that companies which
are successful in avoiding ESG risks whilst capturing ESG opportunities will outperform over the
longer term.
Environmental issues: encompass pollution and contamination of land, air and water; related
legal and regulatory compliance; eco-efficiency (“doing more with less resources”); waste
management; natural resource scarcity; and climate change. Many environmental challenges also
present opportunities for value creation, for example, generation of incremental revenue from
new technologies, products and markets such as ‘green’ / sustainable products and services.
Social issues: encompass the treatment of employees; health and safety; labour conditions;
human rights; supply chains; and treating customers and communities fairly.
Governance: in a responsible investment sense, this term is generally held to encompass the
governance of environmental and social issue management, plus the areas of anti bribery and
corruption, business ethics and transparency.
Our approach
We spoke to 17 private equity Interviews were conducted with Interviews were supplemented with
houses, including: members of senior management desk-based research on each PE house,
• six of the top ten largest global – either with dedicated ESG or including consideration of company
PE houses¹ sustainability specialists/teams websites and relevant reports (e.g.
where these exist, or with individuals Citizenship/Corporate Responsibility
• 11 of the top 50 largest global
drawn from other functions and reports). Interviews were undertaken
PE houses¹
roles (e.g. Operations, Public Affairs, during the period from November 2011
• six mid-tier houses Communications, Investor Relations through to January 2012, and relied
• ten with headquarters in Europe, and or Legal Counsel) who have additional upon a common set of questions being
• seven with headquarters in the US. responsibility for the ESG agenda. posed to each participant.
Interviews, unless specifically agreed
otherwise, were undertaken on a non-
attributable basis.
¹ ased on Private Equity International’s 2011 ranking of the top 300 private equity firms by size, ranked on the amount of private equity
B
direct-investment capital each firm has raised over a five-year period (www.peimedia.com/Pages.aspx?pageID=3155).
Responsible investment: creating value from environmental, social and governance issues March 2012 1
4. Section 1 –
Executive Summary
There are two key drivers of differentiate themselves and to secure There are some interesting contrasts
responsible investment in the PE and maximise their access to capital. between the approaches of US-
industry: risk management and The other leading driver of RI activity headquartered PE houses and that of
investor concern is risk management, followed by cost their European counterparts. The
Investor concern, founded on the view savings, ‘tone from the top’ and US-headquartered participants tend
that ESG issues have the potential to regulatory pressure. to focus primarily on realising value
materially impact the valuation of through a focus on eco-efficiency
investments over the longer term, has The PE industry response initiatives whereas their European-
been ramping up in recent years. to responsible investment headquartered peers are more likely
Indeed, for some PE houses, this has is evolving rapidly to incorporate a broader range of
been the key catalyst for adopting a Notably, all of the houses we spoke environmental and social issues into
responsible investment (RI) approach. to consider environmental and their investment decision-making
The importance of investor pressure is social issues to some extent during processes. Many houses, regardless
set to grow in the near future: 88% investment appraisals. However, of where domiciled, are of the view
of survey respondents believe that houses take very different approaches, that the PE business model already
Limited Partner (LP) attention to ranging from ad hoc and case-by-case places great scrutiny on governance
ESG issues will increase in the next through to the more progressive and that this issue is already well
five years. In an increasingly approaches, such as that of Apax managed by most.
competitive fundraising environment, Partners, where purpose-built ESG
managing ESG risks and opportunities due diligence frameworks are followed
is another way for PE houses to for every potential acquisition.
2 PwC
5. Interestingly, the survey did not A challenge common to all remains Attention to ESG issues is set
reveal any correlation between the that of quantifying the value of to increase
size of the PE house and the maturity ESG programmes or responsible As of now, the industry’s overall
of their approach to RI. This finding investment strategies response to the RI agenda can be
is consistent with our own experience Whilst a resounding 94% of the characterised as very much a ‘work in
of the PE market. participants surveyed believe that progress’. But that looks set to change:
ESG activities can create value, far 94% of PE houses surveyed said that
Whilst there has been much fewer are attempting to measure the their attention to ESG issues will
progress in developing and value of these activities. Measuring rise over the next five years. What
implementing RI strategies over the value created through will they be focusing on? Many have
recent years, our results indicate environmental and social initiatives, plans in place to develop their
that there is still some way to go: relies on the availability of relevant responsible investment or ESG
• 50% of the houses we surveyed financial data and for most PE houses programmes further, citing policy
lack a policy on ESG issues and/ this is not yet readily available at development, valuation and reporting
or responsible investment a portfolio level. Some PE houses as focus areas for 2012 and beyond.
(e.g. KKR and Doughty Hanson)
• only 40% have put systems in place
have successfully measured cost
to measure value created from
savings achieved from eco-efficiency
initiatives (this is particularly
initiatives but even the more advanced
relevant for initiatives addressing
PE houses are struggling to measure
environmental and social issues
the intangible benefits of their ESG
which tend to have more direct
initiatives. While this challenge is
impacts), and
common to other sectors, developing
• 47% of the houses surveyed do a best practice approach to valuation
not report publicly on their ESG is perhaps particularly pertinent for an
programmes or their responsible industry focused on creating value.
investment strategies.
Summary survey findings
A snapshot of the present
Investment cycle
Policy Acquisition Hold Exit Reporting
50% of participants All participants Approaches to It is difficult to 47% of participants
lack a policy on consider ESG issues managing ESG quantify the extent provide no, or
ESG issues and/or to some extent issues during the to which strong limited, reporting
responsible during investment hold period are ESG management on ESG issue
investment appraisals diverse contributes to a management
good exit valuation
Five years from now
94% of participants believe that ESG The majority of participants believe 94% of PE houses believe their
issues will become more material to that LP attention to ESG issues will attention to ESG issues will increase
their business increase
Responsible investment: creating value from environmental, social and governance issues March 2012 3
6. Recommendations diligence, and ensuring that action 4) Ramp up reporting
Drawing on our experience, we have points from the pre-acquisition phase One notable survey finding is the
four recommendations which we are integrated into the 100 day plan. relatively limited external reporting
believe can help PE houses, and their Procedures should also include on RI by the PE industry; most
portfolio companies, to enhance their consistent tracking and reporting participants agreed reporting is still
ability to create value from RI, and of ESG performance. ‘quite superficial’. PE houses can
stay ahead of the competition. benefit and adapt from the
The most progressive PE houses strive considerable progress made on ESG
1) Access the right expertise to capitalise on environmental and reporting in the corporate sector (and
Many of the houses we spoke with social opportunities, rather than using integrated reporting more broadly).
cited lack of internal capacity and ESG due diligence only as a means of
expertise as a barrier to implementing ‘de-risking’ their investments. Several PE houses are relying on
their RI goals. Hiring in to build the use of case studies for reporting.
in-house teams is an unlikely option, 3) easure the financial
M Case studies can be a highly effective
given the ‘lean’ structure of many PE value created means of showcasing progress and
houses and the current economic Measuring ESG performance success, but there are several pitfalls
climate. PE houses need to think improvements and ascribing financial to be aware of: there is the risk of
innovatively to access the right value to these remains a challenge unbalanced (i.e. ‘good news’ only)
expertise (in particular on for many. Standard valuation reporting, and the need for
environmental and social issues) and methodologies (such as discounted transparency regarding the role of
keep their RI programmes on track. cash flow models) can be used to the PE house in bringing about
There are already some great quantify the value of RI initiatives. ESG improvements in the portfolio
examples of this in the marketplace: This includes both direct and indirect companies. Finally, PE houses could
PE houses are forging collaborations value drivers. The key challenge in consider proactively engaging with
with third parties, hosting knowledge- conducting these exercises is the LPs to help define future ESG
sharing events for their portfolio availability of ESG relevant financial reporting requirements.
companies, offering ESG training to data: given enough data, it is possible
deal teams and securing external to establish a credible link between
expertise when required. ESG activities and intangible value.
2) Adopt best practice approaches Tips for measurement and valuation
Approaches to managing include focusing on quality not
environmental and social issues quantity, aiming for consistency not
during the investment cycle are uniformity (given material issues
diverse. Following best practice will for each portfolio company will
help PE houses to maximise value vary depending on their sector and
from their RI activities. This would geographic location), and considering
include adopting a consistent and qualitative assessment options if the
systematic approach to ESG due costs of gathering quantitative data
are prohibitive.
4 PwC
7. Section 2 – Findings
2.1 Drivers for responsible investment activities
We asked each of the PE houses what motivates them to pursue a RI approach. Many
cited the same drivers – but not necessarily in the same order of importance.
These are the most commonly cited reasons (from most common to least).
Risk management and investor Importance of identifying and understanding ESG risks
interest are the two most and managing regulation and compliance throughout the
Risk management lifecycle of an investment.
significant drivers for action,
by some margin
Increased interest (and questions) from LPs, many of whom
Interest from are signatories to the UN PRI, prompted participants to
investors define their RI approach and collect information from
portfolio companies.
Opportunities Participants can see opportunities to realise additional
for cost savings/ value through performance improvement and operational
operational efficiencies, in particular eco-efficiencies.
efficiencies
Those at the top of the organisation place a great emphasis
Tone from on the importance of a RI approach.
the top
For participants operating in the UK both the UK Bribery
Act and the UK Government’s Carbon Reduction
Regulation Commitment Energy Efficiency Scheme were cited as
drivers for action.
Responsible investment: creating value from environmental, social and governance issues March 2012 5
8. Risk management and interest from “ ncorporating ESG concerns
I A few houses mentioned reputation
investors are the two most significant into the investment process is and competitive differentiation as
drivers, by some margin. Value creation about good, long-term investing drivers for RI activities – but not major
did feature among the top four reasons, – GPs and their portfolio ones. Or as one participant put it:
but generally only in terms of cost
companies need to manage these
savings – as achieved through eco-
issues appropriately to minimise “ his [managing ESG issues] will
T
efficiency programmes (doing more
using fewer resources saves money
risks and maximise returns.” not differentiate players for long
and benefits the environment). David Russell
… after all, in five years, everyone
Several participants pointed to the Co-head of Responsible Investment will be doing it.”
increased saleability of portfolio Universities Superannuation Scheme European-headquartered PE House
companies as a driver – but there was
a general consensus that it’s ‘too early
The United Nations Principles for Finally, it’s worth noting that at least
to show proof of concept’.
Responsible Investment (UN PRI) three of the PE houses said that
initiative also came up during our Generation Y is becoming an
Most PE houses agreed that LP
discussions about LPs. This is a increasingly important driver of the
concern is a significant reason for
voluntary framework which investors RI agenda. They’re key stakeholders,
increasing engagement with the RI
can use to incorporate responsible as either potential employees or
agenda. Indeed, some are timing their
investment into their decision-making consumers. And they have higher
activities (e.g. drafting RI policies) to
and ownership practices1. Many LPs expectations and demands for
tie in with their upcoming fundraising.
have signalled their commitment to responsible products and services
However, there was a notable split in
the RI agenda by signing up to the UN than their parents.
opinion about the role LPs play in
PRI, and they need to demonstrate
driving change. Many houses said
compliance publicly (including
that interest from LPs was their main
probing general partners on their
driver – but this was more common
approach to responsible investment).
among PE houses with their
Similarly, as investors themselves,
headquarters in Europe.
more and more PE houses are signing
up to the UN PRI too. To date, 41%
of the houses we surveyed have
signed up.
Our point of view
In the near future, certainly for In our experience, another driver The challenging nature of ESG risk
European-headquartered houses, for RI is moving into growth management in growth economies
the UN PRI is likely to take on economies – whether it’s the PE is consistent with findings from our
more significance as a driver of RI. house itself that’s expanding, or its recent report Getting on the Right
There is anecdotal evidence that portfolio companies. ESG risks and Side of the Delta: A Deal-maker’s
many PE houses are seriously opportunities are inherently higher Guide to Growth Economies2. This
considering signing up to the UN in growth economies – because report found that doing deals in
PRI. If they do, they’ll have to report national and regulatory frameworks growth economies remains
publicly and regularly on their are generally weaker and due to incredibly challenging.
approach to ESG issue management cultural differences. As a result,
– and that, in turn, is likely to we’ve noted that many PE houses
sharpen their focus on procedures apply greater scrutiny to ESG issues
and metrics. Progress will need when their portfolio companies are
to be demonstrated from one expanding into growth economies.
reporting period to the next to
retain credibility.
¹ y 2011, GPs and LPs representing US$30 trillion of assets (representing 20% of the world’s capital) had signed up to the UN PRI.
B
www.unpri.org/publications/annual_report2011.pdf
² www.pwc.com/gx/en/deals/doing-deals-in-growth-economies/index.jhtml.
6 PwC
9. In terms of the allocation of day-to-
day responsibility for managing RI
programmes, different houses adopt
different approaches. At one end of
the spectrum, there is a small number
of PE houses with dedicated in-house
RI teams. Most of the others have
made RI activities an additional
responsibility of an existing role or
team (usually public affairs, investor
relations, operations or legal counsel).
This type of set up is at times resulting
in the PE house having to limit their RI
focus to a sub-set of portfolio
companies, rather than being able
to adopt a portfolio-wide approach.
Many PE houses agreed that lack of
internal capacity and expertise is a
barrier for progress in the management
of environmental or social issues.
2.2 Internal capacity With regards to rewards and
Virtually all the participants we talked incentives, at least one PE house
to were able to identify a senior or with a dedicated in-house expert
executive level sponsor with ultimate told us this individual is assessed and
responsibility for overseeing the rewarded on exactly the same basis
house’s RI strategy. Three of the PE as their colleagues in the operational
houses we interviewed have Executive- efficiencies team (whose job is to
level committees that are responsible realise operational efficiencies across
for overseeing their responsible portfolio companies). Only one house
investment strategies. mentioned that ESG objectives are
woven into the job specifications of
all staff.
Our point of view
Lack of internal capacity and • Forge partnerships and • Join/consult with industry
expertise can be a major barrier to collaborations – examples associations which provide
implementing responsible investment in the market include KKR and guidance, e.g. UN PRI and
programmes. Hiring in to build Carlyle partnering with the the British Private Equity and
in-house teams is an unlikely option, Environmental Defense Fund Venture Capital Association
given the ‘lean’ structure of many PE to drive eco-efficiencies, and have developed RI guidelines.
houses and the current economic portfolio companies working
• Engage external consultants
climate. What can PE houses do to closely with special interest groups
to support with the development
access the right expertise? such as the Marine Stewardship
and implementation of RI
Council and the Forestry
• Develop internal capacity of strategies.
Stewardship Council to generate
deal teams (e.g. via training
revenue from new product ranges
programmes) to help integrate Private equity industry associations
(sustainable seafood and
management of environmental could also consider providing
sustainable timber, respectively).
and social issues into investment training programmes on RI for
decision-making. • Facilitate knowledge sharing their members.
between portfolio companies –
Apollo Global Management and
TPG have both hosted portfolio
company events for this purpose.
Responsible investment: creating value from environmental, social and governance issues March 2012 7
10. 2.3 Policies and procedures
Policies
50% of the houses we
The vast majority of the houses we Our point of view
surveyed lack a responsible surveyed believe that ESG issues Publishing a RI policy in the public
investment policy will become more material to their domain will create an
business and 94% believe ESG activity expectation with stakeholders
can help create value (see section 2.4). and make PE houses accountable
Despite this 50% are yet to develop a for following through and
specific policy to manage it. putting their plans into action.
Two of the participants we talked to An effective policy:
said they were in the process of
• clearly sets out the investment
developing a policy, or expected to
ethos of the house and drives
have one within the next 12 months.
consistency of approach
Anecdotal evidence shows that houses
with formal policies usually have more • lists excluded sectors and
sophisticated procedures to manage clearly communicates
ESG risks. minimum standards, and
• explains how commitments
Several participants felt that even
are underpinned by robust
though they don’t have a formal
procedures.
policy, it doesn’t necessarily reflect a
lack of commitment or action on their
part. They argue that paying attention
to ESG issues has always been
‘business as usual’ – so it exists, even
though it’s not officially called ‘ESG’
or ‘responsible investment’.
Investment cycle – acquisition
All the houses we spoke to consider
Everyone we spoke to said they think Our point of view
ESG issues to some extent during about potential ESG issues as part of • During the pre-acquisition
investment appraisals due diligence procedures. However phase, houses could do more
there are considerable differences in to explore opportunities
the formality of the processes and the associated with environmental
depth of analysis performed. and social issues rather than
just using ESG reviews to
A number of the houses we surveyed ‘de-risk’ their existing
are carrying out ESG due diligence on investments.
an ad-hoc, case by case basis (excluding
• PE houses should consider
basic legal/compliance checks). By
the best way to act on
contrast, the more progressive houses,
findings from pre-acquisition
such as Apax Partners, have committed
ESG assessments. Unless
to carrying out ESG due diligence on
findings are built into the
every potential acquisition – and have
100-day plan (or other targets
a purpose-built framework for doing so.
set for the hold period),
Very few PE houses are explicitly there’s a risk that
linking these due diligence assessments environmental and social
to concrete actions in the hold period. action points will be sidelined
Only one of the participants we as niche issues rather than
surveyed said their ESG assessment being integrated into core
feeds directly into the ESG targets they business strategy and practice.
set for their portfolio company as part
of the 100-day plan.
8 PwC
11. Investment cycle – hold period Two of the US-headquartered houses
Houses take very different The way PE houses manage ESG we interviewed – Apollo Global
approaches to ESG issues during risks and opportunities in their Management and TPG – shared
the hold period portfolio companies during the hold their novel approach to engaging
period varies considerably – from portfolio companies on ESG issues
ad hoc, to well-established, systematic and demonstrating the opportunity
procedures. to create value. They both run
‘knowledge-sharing conferences’
Those with a more systematic for the benefit of their portfolio
approach tend to have a process in companies, where they can showcase
place which: their most successful eco-efficiency
activities and show how they’ve led
1. dentifies potential ESG risks and
i
directly to cost savings, as well as
opportunities (e.g. eco-efficiencies
fostering the deployment of solutions,
or health and safety performance
programs and goals across portfolios.
improvement) across their portfolio
of companies
“ here’s real potential to lose
T
2. stablishes action plans and targets
e
value in a portfolio company if to realise opportunities or mitigate Our point of view
you fail to focus sufficiently on risks, and During the hold period, PE
managing ESG risks.” houses could undertake the
3. onitors ESG performance (or
m
European-headquartered PE house following steps to enhance
progress against action plans)
management of environmental
on an ongoing basis.
and social issues in particular:
Many of the major US-headquartered • form partnerships with
houses we interviewed are following portfolio companies to identify
a common model, where in-house and address environmental
teams essentially act as consultants to and social priorities
portfolio companies. These ‘consultants’
• set ESG objectives and targets
focus almost exclusively on achieving
with portfolio companies
environmental efficiency in portfolio
companies, rather than on the wider • baseline existing ESG
environmental, social or governance initiatives to understand what
issues. Typically they spend a is in place and so that progress
considerable amount of time with one can be measured going forward
company to produce positive results,
• require regular upward
before moving on to the next.
reporting on ESG
improvements, and
• provide portfolio companies
with external support and
expertise.
Responsible investment: creating value from environmental, social and governance issues March 2012 9
12. It’s difficult to quantify the extent Investment cycle – exit there is anecdotal evidence that it
Most participants agreed that good can be a factor in the sale price. One
to which strong ESG management
management of ESG issues in portfolio participant, Actis, shared an example
contributes to a good exit valuation companies certainly ‘doesn’t hurt’ the of how a purchaser paid an enhanced
exit valuation. But they were less purchase price for one asset, partly on
certain about how much of any rise the grounds of the company’s
in value can be put down to ESG corporate responsibility credentials.
activities. One participant said: Another interesting insight shared by
Actis was that they assess the ESG
credentials of potential buyers of their
“ sound approach to ESG issues
A
portfolio companies, before agreeing
can enhance both earnings and a sale.
multiples. Companies with strong
policies and practice in this area
“ ood ESG issue management
G
are much easier to sell.”
might lead to a small uplift in
Patrick Dunne, 3i EBITDA multiples on exit,
and will improve saleability
Whilst it is clearly a challenge to of the asset.”
quantify the impact of ESG
management activities on sale prices, European-headquartered PE house
10 PwC
13. “ ortfolio companies will be reporting back to us for the first time this
P
year on what they commit to measure.”
US-headquartered PE house
2.4 Measuring value • In December 2011 KKR reported
A resounding 94% of the participants that since its inception in 2008 the
we surveyed believe that ESG activities portfolio companies which have
can create value. But only 40% have participated in its Green Portfolio
begun to measure this value by putting Programme have achieved “more
formal processes in place to track the than $365 million in financial
impacts of ESG initiatives. impact and avoided 810,000 metric
tons of GHG emissions, 2.2 million
Indeed, many of the houses that we tons of waste, and 300 million litres
spoke to are still in the early stages of of water” ¹.
collecting ESG performance data from
• In their 2011 report ‘Private Equity
their portfolio companies in a
and Responsible Investment’
systematic manner. Just identifying
Doughty Hanson reports savings and
appropriate ESG metrics which are
additional income of €18 million
applicable across a portfolio can be
through a focus on ESG issue
challenging given the broad range of
management resulting in the
sectors and geographies comprising
avoidance of 200,000 tonnes of
the portfolios of most houses; while
carbon dioxide, 150,000 tonnes of
ensuring the integrity and
waste and the release of 260,000
comparability of the reported data is
cubic meters of water. Doughty
an ongoing management issue. The
Hanson estimates that another €21
fact that LPs are asking PE houses for
million per annum is achievable².
more data on ESG management, but in
a non-standardised way, makes However, few if any houses appear to
developing an effective measurement have successfully quantified the
framework for ESG activities even indirect value arising from RI. Indirect
more complicated. value includes intangible factors such
as the contribution of ESG initiatives
Moreover, to assign a financial value to to customer loyalty, brand value or
Quantifying the value that ESG
ESG initiatives requires PE houses to maintaining preferred supplier status
activities create is still a work in
collect ESG-relevant financial data. and the benefits of RI programmes in
progress for most For example the upfront investment in terms of protecting against
eco-efficiency measures and the reputational risk.
corresponding cost savings in terms of
energy, water or waste management, There are a number of challenges in
in addition to ESG performance valuing the indirect benefits of ESG
information (e.g GHG emissions, initiatives. These are similar to those
water use, waste generation). Again, faced in attaching a value to other
few houses are systematically business intangible assets such as
“ he issue is to show how [we]
T collecting such data. organisational know-how, customer
are using ESG levers to create relationships or an engaged workforce.
value. Only tangible benefits Some houses have begun to attach a They include the absence of a market
are tracked, but there is a strong financial value to ESG initiatives by price for the asset (since intangibles
belief in the intangible value too.” tracking their direct benefits. These often can’t be separately traded) and
include cost savings achieved from the fact that their worth to one
European-headquartered PE house
eco-efficiency initiatives or revenue company may be completely different
growth achieved from new more to another since companies may have
sustainable products. For example: different opportunities to exploit an
intangible asset through their
networks, relationships and
innovation processes.
1
www.green.kkr.com/results
2
www.doughtyhanson.com/responsible-investing/~/media/Files/D/Doughty-Hanson-Co/Attachments/WWF%20report%20Final.pdf
Responsible investment: creating value from environmental, social and governance issues March 2012 11
14. “ his is an imprecise science
T However, despite these difficulties, the company performance on key ESG
and will evolve over time.” markets are effectively attaching a issues (e.g. environment, workplace,
value to business intangible assets community and so on) against
European-headquartered PE house every day. One way in which they do pre-defined ‘maturity levels’. Again,
this is to use non-financial and this enables comparison between
qualitative indicators. This is an companies, funds and year to year
approach which has been adopted by performance.
several houses to measure ESG
activities (tangible and intangible). Finally, whilst virtually everyone we
“ here it is feasible to measure
W
Whilst such approaches do not provide surveyed believes ESG activities can
– do it.” data to support valuation exercises, create value, not everyone believes
European-headquartered PE house they do allow the PE house to track that this needs to be measured and
progress on ESG issues from year to quantified. However, as an interesting
year, and from company to company. counterpoint to this viewpoint,
For example, at least one PE house has respondents from at least three PE
developed a defined set of qualitative houses said that despite scepticism
measures, applicable to all portfolio about their programmes at first, it was
companies, which it uses to monitor easier to get senior colleagues and
company performance once a year deal teams on board once the hard
(using a red/amber/green light evidence of financial savings started
system). Another approach which was coming in.
mentioned is to score portfolio
Our point of view
Why value the impacts of establish a credible link between that are required by all portfolio
responsible investment? ESG activities and intangible value. companies, together with some
There are a number of benefits to sector specific metrics.
A recent publication by WWF and
quantifying the financial value of
Doughty Hanson discusses methods • Strive for quality not quantity.
RI for a PE house. These include
for ascribing value to ESG activities It is usually better to focus on
helping to focus RI engagement
in more detail. We provided establishing robust reporting
with portfolio companies on the
technical advice and guidance to protocols and processes for a
most value adding activities,
WWF during the preparation of that subset of data going forward
facilitating communication with
publication¹. than to try to cover all the possible
potential investors about RI in
indicators or to seek historic data
terms that they can understand
Some tips for getting started: of dubious quality.
and establishing a robust business
case for further engagement with • Take small steps. RI reporting is a • Consider qualitative
portfolio companies on ESG issues. journey. Initial expectations for approaches. Qualitative self
portfolio companies can be set low assessment approaches are
How to value RI activities? and raised up over time. a useful option if the costs of
We use standard valuation gathering quantitative data
• Borrow and adapt. There exist
methodologies (such as discounted appear prohibitive.
global reporting frameworks for
cash flow models) to quantify the
ESG issues (e.g. GRI sustainability • Valuation: start with value
value of RI initiatives. This includes
reporting guidelines or ISO26000) drivers. If valuation is your
both direct and indirect value
and issue specific standards (e.g. eventual goal, the first step
drivers. Commonly used methods
GHG protocol). These can be should always be to map the
such as conjoint analysis and real
easily adapted to needs of PE key pathways through which RI
options analysis can be applied to
houses and adopted gradually. creates financial value and seek
indirect value drivers and can be
some basic business data that
used to impute values to different • Consistency, not uniformity,
will help determine materiality.
attributes of a brand or product. is key. The material issues for
This will help identify the relevant
The key challenge in conducting each portfolio company will vary
metrics to inform your RI
these exercises is the availability depending on their sector and
reporting framework.
of ESG relevant financial data: geographic location. Consider
given enough data it is possible to defining a core set of metrics
1
www.doughtyhanson.com/responsible-investing/~/media/Files/D/Doughty-Hanson-Co/Attachments/WWF%20report%20Final.pdf
12 PwC
15. There is limited public reporting 2.5 External reporting 2. houses are cautious about
PE
One notable finding to come out of making any statements or claims
of how ESG issues are managed –
this survey was the relatively limited about their RI policies and
external reporting is a focus area amount of external reporting by some procedures unless they’re confident
for 2102 PE houses on their RI approaches and they have strong enough procedures
activities. On their websites, almost in place to underpin their strategies
half (47%) either don’t mention RI, or – or solid stories to tell about how
only mention a high level commitment management of ESG issues
to managing these issues. Most creates value.
“ e need to explain how we
W participants agreed reporting is still
Those that are reporting externally
work and the benefits we provide ‘quite superficial’. Many also said
tend to use case studies to highlight
to society.” external reporting is an area they’ll be
the ESG management ‘success stories’
focusing on in 2012.
US-headquartered PE house of value creation in their portfolio
companies. However, based on our
In many cases, there is more activity
conversations, some in the market are
going on than is being reported
“ lot of LPs are asking how this
A troubled by the use of case study based
externally. There seem to be two main
gets measured... they are looking reasons for this ‘under-reporting’:
reporting. They query the role of the
for integrated financial reporting.” PE house in the ‘success story’ and, in
1. houses are nervous to say too
PE particular, whether the achievements
US-headquartered PE house much because there’s limited are down to the portfolio company
common understanding of what management’s own strategic vision
constitutes best practice in reporting and planning, rather than an outcome
(so they find it difficult to predict of the PE house’s RI approach.
how they might be viewed), and
Our point of view • learn from considerable progress Beware the pitfalls of using
To develop and improve reporting, made on sustainability reporting, case studies:
PE houses should: including integrated reporting,
elsewhere in the private sector. • nless PE houses show how their
U
• link their environmental RI approach played a role in
Right now, the UN PRI is reviewing
and social risk management bringing about ESG improvements,
its annual assessment process of
activities to value generation they run the risk of being
signatory compliance. This review
challenged. Is the portfolio
• identify material ESG factors will affect the reporting and
company’s sustainability success
and focus on these disclosure requirements (Principle
down to management’s strategic
#6). It’s possible that there will be
• proactively engage with LPs to decision-making, rather than
an element of mandatory reporting
shape and streamline future RI driven by the house RI strategy?
for signatories in the future. For
reporting requirements – this will The harshest sceptics may see
those PE houses that are (or are
put PE houses on the ‘front foot’ such reporting as an attempt to
soon to be) signatories, it would be
rather than having to react to take credit for the portfolio
wise to revamp their reporting to
multiple requests for information company’s work.
include better quality, more robust
presented in different ways
information. • E houses also run the risk of
P
• be transparent – share successes being accused of unbalanced
as well as challenges and make For more guidance on good practice reporting, i.e. ‘good news’
sure that claims are not made reporting, including sustainability reporting only.
that cannot be supported reporting and integrated reporting,
please visit our dedicated portal at
• report against targets, including
www.pwc.com/corporatereporting.
year-on-year, and
Responsible investment: creating value from environmental, social and governance issues March 2012 13
16. A geographic perspective: contrasting approaches
between US and European-headquartered PE houses
One interesting theme to emerge Most of the US-headquartered PE
from our survey is the difference in houses said that social issues are ‘on
attitude and approach to RI between their radar’ and conceded that they
the US-headquartered PE houses and are yet to be tackled in earnest. A few
those in Europe. mentioned this would be an important
focus area for 2012.
US-headquartered PE houses are
focusing squarely on the environmental Likewise, governance is an area that
pillar of the responsible investment came up much more frequently in
agenda – in particular, eco-efficiency. our discussions with European-
Such initiatives deliver cost savings headquartered PE houses. Many of
from using less energy and water, these houses noted that the UK Bribery
cutting waste and making production Act (which came into force in July
processes ‘leaner’. The efficiencies 2011) has helped to deepen their
achieved are relatively easy to measure understanding of the way their
and can be expressed in cash terms. portfolio companies manage bribery,
corruption and ethical risks. As a result
By contrast, European-headquartered of their recent efforts to comply with
PE houses appear to be addressing a the Act, many houses are now armed
broader range of issues, on the whole with better quality management
– not just the environmental aspects, information on bribery/corruption.
but the social and governance ones too. As a result, there’s more focused
Several houses described how they’re effort going into strengthening any
working with their portfolio companies weaknesses in this area. Anecdotal
to improve the way they manage evidence suggests that the next step
‘social’ issues like labour issues in for some of these houses is to apply
supply chains, health and safety, the same level of scrutiny to
and employee management. In these governance across all of the
cases, the benefits are intangible (e.g. companies in their portfolio –
decreasing turnover and attrition, especially in emerging markets.
boosting morale to increase
productivity and retention, attracting
new customers, and enhancing Are large PE houses doing more on the responsible
reputation and brand). investment agenda?
From our own experience of the PE market, there does not seem to
be a correlation between PE house size and commitment to a RI. Our
survey backs this up – we found no clear dividing line between the two
groups of PE houses. In fact, contrary to expectation, 50% of mid-tier
participants are UN PRI signatories, compared to 36% of larger houses.
Interestingly we also found little evidence that RI approaches are more
developed in publicly owned PE houses. Indeed, a higher proportion
of non-listed PE houses had RI policies compared to their listed peers.
These findings seem to imply that a key determinant of commitment
to the RI agenda is the PE house strategy/ethos, rather than simply size
of assets under management or type of ownership.
14 PwC
17. 2.6 Looking ahead Will investors pay more or less Will PE houses do more or less
We also asked the PE houses we attention to ESG issue management about ESG issues?
surveyed how they think responses to by PE houses? We asked each of the PE houses we
ESG issues might evolve over the next With only two exceptions, all of the PE surveyed whether they expected
five years. We discussed future trends houses we interviewed believe that their own ESG activities to increase,
in three specific areas: the materiality LPs will pay more attention to ESG decrease or stay the same over the
of ESG issues, how much attention issues over the next five years. Of the coming five years. Once again, the
LPs will pay to ESG management, two who disagreed, one believes that vast majority shared the same opinion:
and how their own approach to RI LPs will shift their focus to other issues 94% said they expected it to go up.
will change. over time. The other believes they When prompted to describe how
won’t pay any more or less attention to their approach to RI will evolve,
Will ESG issues be more or less ESG issues than they do now. some of the answers were:
material?
• formalising a policy
94% believe ESG issues will become Many of the European-headquartered
more material over the next five years. PE houses said they had seen a clear • increasing internal and external
rise in questions from LPs on how they reporting on how ESG issues are
They also broadly agree that manage ESG issues, and many expect managed – many said they expect
demographic shifts in their customer this trend to continue. As we’ve to be requesting more upward
base (Generation Y) will have an already noted, this increased attention reporting from their portfolio
influence. The next generation tend to from investors has been a catalyst for companies in the near future
have higher demands and expectations several PE houses to formalise and
• a greater focus on measuring ESG
for responsible products and services. strengthen their RI approach. So it
improvements and attempting to
seems LPs will continue to be an
quantify value, and
important driver of ESG activity in the
“ ESG issues will be] no less
[
PE sector. • increased engagement with deal
important but there is likely to be teams, portfolio companies and LPs.
a lull due to financial markets.
But these issues will return and “ nterest will grow – especially if
I
grow stronger in time.” value can be shown.” “ e will focus on developing a
W
more structured programme with
European-headquartered PE house European-headquartered PE house
our portfolio companies. By the
end of 2012, we will have met
with each portfolio company at
“ hey [ESG issues] will become
T “ es [interest from LPs on the
Y least once to discuss monitoring
more important. However, management of ESG issues will [of ESG performance].”
financial uncertainty will serve increase]. But to some extent, it US-headquartered PE house
to push management of these will depend on progress in the
issues down the agenda.” political arena on climate
change.” “ e will be doing more, not less,
W
European-headquartered PE house
European-headquartered PE house especially in terms of measuring
impacts/performance
improvement, and in reporting.”
“ ore important – especially the
M
environmental area.” European-headquartered PE house
European-headquartered PE house
Responsible investment: creating value from environmental, social and governance issues March 2012 15
18. Editorial team: Key contacts:
Shami Nissan John Dwyer
PwC UK PwC UK
T: +44 (0)20 7213 1195 Global Head of Deals
E: shamiram.nissan@uk.pwc.com and Private Equity
T: +44 (0)20 7213 1133
Phil Case E: john.p.dwyer@uk.pwc.com
PwC UK
T: +44 (0)20 7212 4166 Malcolm Preston
E: philip.v.case@uk.pwc.com PwC UK
Global Sustainability Leader
Lauren Kelley Koopman T: +44 (0)20 7213 2502
PwC US E: malcolm.h.preston@uk.pwc.com
T: +1 646 471 5328
E: lauren.k.koopman@us.pwc.com Tim Hartnett
PwC US
Flora Paul US Private Equity Sector Leader
PwC UK T: +1 646 471 7374
T: +44 (0)20 7212 6280 E: timothy.hartnett@us.pwc.com
E: flora.v.paul@uk.pwc.com
David Brown
PwC China
Greater China Private Equity Leader
T: +852 2289 2400
E: d.brown@hk.pwc.com
Richard Burton
PwC Germany
EMEA Private Equity Leader
T: +49 69 9585-1251
E: richard.burton@de.pwc.com
Charles Humphrey
PwC Australia
Australia East Cluster
Private Equity Leader
T: +612 8266 2998
E: charles.humphrey@au.pwc.com
16 PwC