ESG perspectives

Hear an LP, a GP and a fund administrator perspective on current and future ESG thinking and practice

ESG may have been a feature of private markets for some time, but many LPs and GPs are still getting to grips with how to manage and report on it.

Here, we offer three different perspectives – from an LP, a GP and a fund administrator - on current and future ESG thinking and practice.

The LP

Alison Nankivell is Senior Vice President, Fund Investments and Global Scaling at the Business Development Bank of Canada.

“As an LP, our programme is not so much focused on ESG-compatible or impact funds, but rather that ESG is embedded in a fund’s strategy. This means they have a process to put companies on a path to improved sustainability that will, ultimately, lead to better returns on exit. If you are doing that, you are adding value.

“This contrasts with the approach some parts of the market have taken, where the manager may say: we’re a biotech investor and because of that, we invariably target the health and wellness of the global population and so we are a social impact fund.

“Some GPs also still see ESG as a layer of burden rather than understanding that it should be core to the returns profile they are building for portfolio companies. As a result, it is often treated as an add-on that sits in a separate department. ESG should be integral to mitigating risks and maximising profitability – it is not a cost centre.

“There has to be a dialogue between LPs and GPs to agree a system that determines what measures portfolio companies will implement, how progress will be tracked and how GPs will report this to LPs.

"There needs to be a commitment at the outset and there has to be demonstrable change and value add, regardless of having an impact label or not.

“This does require a harmonised approach among LPs to due diligence – we need to be asking the same set of questions of GPs so that we can understand and compare GP performance and practice in ESG. This also takes the pressure off GPs because we don’t want everyone to rebrand themselves. We’d far rather an honest dialogue about what the GP wants to do.

“There is now a greater appreciation of risk among LPs and GPs – there is high reputational risk associated with not acting responsibly. We all need a licence to operate. Greenwashing will be called out as regulators, such as those in US and Europe, start cracking down on this. It will be hard to get away with this in future.”

The VC and entrepreneur

Derek Handley is a New Zealand-based entrepreneur and Founding Partner of Aera VC, which invests in transformative companies that tackle climate change.

“ESG is having something of an identity crisis right now and we are seeing some pushback in the US, where there have been claims that investing according to ESG principles is just ‘woke capital’.

"It’s true that ESG can be confusing to navigate, but what’s less talked about is the risk of not doing this.

“There are so many companies currently that run the risk of not just performing poorly in future but of becoming obsolete. They are tomorrow’s Kodaks. The role of ESG is to generate upside, but also to look at where the downsides will be and what leadership and boards are doing about the risks their companies face.

“Half the economy is barely off the starting block. If the biggest industrial companies built over the past 50 to 100 years don’t transform to become carbon neutral or negative, they will be out of business.

“How do you create, say, chemicals or concrete in a carbon neutral way? It will take transformational technologies. Our first investment was in a carbon neutral chemicals business – it has found a way to make chemicals without petroleum-based feedstock. We’re only a few years in and yet it’s a 100x investment for us already. These will be the US$100bn companies of the future. They will replace the industrial companies of the last generation that have not yet figured out how to decarbonise.

“Investors will also need to take a leap of faith here. We don’t have another 15 years for new managers to reach the magic fund III, when LPs are more prepared to back them. For us as a VC, we have to have conviction in this space and believe that the capital will come because the demand will be there.”

The fund administrator

Nicholas Hulme is the Head of Fundrock Singapore Management Company, part of the Apex Group. He has covered the Asian markets for 12 years and was previously Head of Business development at Unigestion Asia.

“If we are to tackle greenwashing in any meaningful way, we need harmonisation so that we can arrive at global standards.

Every region has different standards and that needs simplification.

There is around a US$25tn industry in ESG-related investments and so it is not surprising that we have seen that somewhere between 30% and 50% of GPs have recently rebranded as green or ESG-related investors, whether or not they are actually driving any sustainability impact.

“Beyond standardisation, one of the most important aspects understanding ESG impact is to identify a way of measuring this over time.

"This needs to be robust, but also repeatable so that firms can collect data over several timespans to measure progress.

“If GPs are serious about ESG, it really has to come from the top. That is the only way it can become fundamentally embedded in the systems and culture of a firm.

“Resources can be an issue, especially given this is still a relatively nascent field. And this is a particular problem for smaller funds because they can’t hire in armies of operators and ESG professionals. But they can get help from third parties with this – we can second people from our team to work with funds on a project-by-project basis to teach and implement ESG practice and processes.”