2 November 2018 Hanneke Mol, Social & Environmental Consultant

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Presentation transcript:

Cash with a Conscience: ESG Reporting Practices in the Private Equity Industry 2 November 2018 Hanneke Mol, Social & Environmental Consultant Arcadis NL hanneke.mol@arcadis.com

OUR EXPERTISE TO CREATE A SUSTAINABLE FUTURE INFRASTRUCTURE RAIL AND URBAN TRANSPORT AIRPORT SOLUTIONS MINING HIGHWAYS AND INTELLIGENT TRANSPORT SYSTEMS PORTS AND INDUSTRIAL INFRASTRUCTURE WATER WATER CONVEYANCE WATER FOR INDUSTRY WATER MANAGEMENT WATER SUPPLY AND TREATMENT SITE EVALUATION AND RESTORATION ENVIRONMENTAL PLANNING ENVIRONMENTAL CONSTRUCTION SERVICES STRATEGIC ENVIRONMENTAL CONSULTING ENVIRONMENT BUILDINGS MASTER PLANNING AND SUSTAINABLE URBAN DEVELOPMENT PERFORMANCE DRIVEN DESIGN CONTRACT SOLUTIONS COMMERCIALLY LED PROGRAM MANAGEMENT BUSINESS ADVISORY ARCHITECTURE & DESIGN

About Arcadis globally 27,000+ EMPLOYEES +3,2Bi EU REVENUE 2017 GLOBAL HEADQUARTERS AMSTERDAM Arcadis presence FOUNDED IN 1888 OVER 350 OFFICES IN 40 COUNTRIES ACTIVE IN 70+ COUNTRIES

Environmental, Social and Governance (ESG) Mission: To promote environmental, social and governance considerations in project financing strategies and investments decisions, as well as project design and performance. Environmental and Social Due Diligence (ESDD); Environmental and Social Impact Assessments (ESIA); Environmental Social Action Plan (ESAP) Operationalization & Implementation; General ESG business advisory to clients; Training, capacity building and other kind of requests. Clients Development/Multilateral Financial Institutions (DFI/MFI) Commercial Investors Project Developers/Multinationals Real Estate Developers For Arcadis, ESG is mostly related to International Project Finance (IPF) performing the above services for either the borrowing or lending party, throughout the different phases in the IPF cycle: Plan Prepare Finance Build Maintain

Today’s paper ESG disclosure practices in the private equity industry Differences between Private Equity Fund Manager (GPs) and Limited Partner (LPs) approaches to ESG management and reporting Why do such differences exist? (And is this necessarily a problem?) Title: Cash with a Conscience: ESG Disclosure Practices in the Field of Private Equity Date: 25 October 2018

Private equity Limited Partners Private equity firm General Partner - Pension funds - Insurance companies - University endowments - Foundations - (International) Financial Institutions - Etc. Limited Partners Private equity firm General Partner Fund x Fund x Fund x Investment x Investment x Investment x Title: Cash with a Conscience: ESG Disclosure Practices in the Field of Private Equity Date: 25 October 2018

Background to today’s paper Small-scale exploratory study in 2015 Hypothesis: there is a mismatch between the approach to sustainability adopted by PE Fund Managers (GPs) and their investment partners (LPs) Findings corroborated this hypothesis. (But: some limitations to the study) Title: Cash with a Conscience: ESG Disclosure Practices in the Field of Private Equity Date: 25 October 2018

Cash with a Conscience (2015) Small-scale exploratory study Web-search, reviewing the websites, annual reports and/or sustainability reports of 50 GPs and 50 LPs 33 headquartered in North America, 14 in Europe, 3 in the Asia-Pacific region Of the Lenders included in the sample: 90% regularly monitored and reported on their ESG performance; 70% were aligned to the GRI framework; 61% published their ESG report on the GRI database. A similar level of transparency was not found in the Private Equity industry, and GPs less committed to ESG disclosure than LPs Title: Cash with a Conscience: ESG Disclosure Practices in the Field of Private Equity Date: 25 October 2018

Visibility of sustainable investment policy on website Title: Cash with a Conscience: ESG Disclosure Practices in the Field of Private Equity Date: 25 October 2018

Annual sustainability reporting Title: Cash with a Conscience: ESG Disclosure Practices in the Field of Private Equity Date: 25 October 2018

Reporting standards and principles PEGCC = Private Equity Growth Capital Council UNEP FI = United Nations Environment Programme Finance Initiative: : A global partnership between UNEP and the financial sector. Over 200 institutions, including banks, insurers and fund managers work with UNEP to understand the impacts of environmental and social considerations on financial performance. INCR = Investor Network on Climate Risks: A network of 100 institutional investors committed to addressing the risks and opportunities resulting from climate change and other sustainability challenges. Title: Cash with a Conscience: ESG Disclosure Practices in the Field of Private Equity Date: 25 October 2018

UN PRI signatories Title: Cash with a Conscience: ESG Disclosure Practices in the Field of Private Equity Date: 25 October 2018

Why these differences? Regulation? Lack of financial incentives? Corporate culture? Board structure? Cultural values and societal perceptions of corporate responsibility? Investor pressure? Stakeholder exposure? …? Paper intended as a discussion piece Theoretical exploration as an impetus for further research Title: Cash with a Conscience: ESG Disclosure Practices in the Field of Private Equity Date: 25 October 2018

Institutional theory ESG integration and reporting shaped by broader social structures  importance of national, cultural and institutional contexts Influence of: Legal and regulatory framework Level of corporate discretion Primacy of shareholder interests vs. more stakeholder-oriented business climate Monitoring by civil society organizations Prominence of labour unions Cultural values I.e.: connection between ESG reporting practices and institutional framework Title: Cash with a Conscience: ESG Disclosure Practices in the Field of Private Equity Date: 25 October 2018

Legitimacy theory Relationship between ESG reporting and the expectations of shareholders and wider stakeholders  ESG reporting as an instrument of legitimacy- seeking Opposing or incongruent value systems Stakeholder exposure and societal pressure to manage E&S issues Public visibility and accountability Title: Cash with a Conscience: ESG Disclosure Practices in the Field of Private Equity Date: 25 October 2018

Signalling theory ESG reporting signals effective and active management of E&S risks Link between ESG reporting and ability of organizations to generate financial return LP expectations as an incentive for enhanced ESG reporting by GPs? Title: Cash with a Conscience: ESG Disclosure Practices in the Field of Private Equity Date: 25 October 2018

Where from here? Sustainability of investments Reputation of private equity Credibility of the ESG monitoring regime Risk management, value creation ESG transparency vs. ESG performance Title: Cash with a Conscience: ESG Disclosure Practices in the Field of Private Equity Date: 25 October 2018