Adveq, a Zurich based fund of funds manager, is rolling out a new model to track progress on environmental, social and governance issues (ESG) at portfolio companies in a bid to increase its responsible investment strategy.
Adveq selected a group called ESG Analytics which has developed a web-based tool to capture ESG factors. The firm ran a pilot exercise last year and is now rolling out the strategy in its European portfolio, said Tim Creed, managing director and head of Adveq’s European investment program.
“We do have a number of [investment] restrictions [for example an exclusion list] which you would expect any good quality LP to include, but this takes things a step further [as it is] looking in much more detail at the E, S, and G of each individual investment,” he said.
At both the fund manager level and the portfolio company level approximately 60 questions have to be filled in about ESG. “The questions are tailored for the type of company by industry, geography and size,” Creed said. He declined to comment on the nature of the questions.
The frequency of tracking ESG developments is yet to be decided, Creed said, adding that measuring ESG is an ongoing exercise. “You don’t do this once and then put it in a cupboard.” Some elements could be assessed annually and others more frequently. “We speak to our fund managers on a monthly basis so we talk with them about [ESG} on that regularity,” he said.
While especially the social aspect of ESG can be hard to measure, Adveq believes it can be done. “If you look at the number of training days that a company provides to its employees, or the costs to recruit people, these are all social aspects within a company that can be numerically measured,” Creed said.
There will always be people who are less enthusiastic and that clearly means you have to spend some time talking about the benefits with some people
The vast majority of the GPs Adveq backs have reacted positively to the ESG analysis at a portfolio company level, according to Creed. “There will always be people who are less enthusiastic and that clearly means you have to spend some time talking about the benefits with some people. We have had a push back from one manager who stated that they already have a detailed ESG approach and they felt repeating [using] our tool was an unnecessary exercise,” he said.
The fact that there are so many approaches to ESG can be problematic, he admitted. “We have been trying to ensure there’s one consistent model which allows us to benchmark and compare one company to another and one GP to another,” he said, although he doesn’t believe there should be one industry model.
“The private equity industry is very diverse with regards to size of companies, geography, and industry and having a one solution fits all, doesn’t work,” he said. “The key for us, as an institutional investor that raises money from pension funds, insurance companies and endowments is to ensure ESG is taken very seriously and is improved for all the companies we work with,” he added.
Private equity is “perfectly” set up to implement ESG, Creed said. “The ownership structure allows private equity to make a better impact in their portfolio companies. ESG would just be one extra thing [GPs] change and improve.” Improving ESG could also improve the value of an investment, he said.
“There are a number of studies that suggest that companies that have incorporated a solid ESG plan are sold for higher multiples,” he added.