Looking past the portfolio company with a view on its relationship with large enterprise customers is being pegged as one of the next big trends in responsible investment.
Already GPs have significantly enhanced their environmental, social and governance (or ESG) policies and procedures, but most haven’t given significant thought to how a portfolio company’s business partners may perceive its impact on the environment and society at large.
“It’s not at the point yet where most GPs are actively managing this issue, but it’s coming up in more conversations with investors and portfolio company executives,” says Ryan Miller, an associate at Malk Sustainability Partners, a consultancy on ESG matters.
Malk recently interviewed a number of GPs on the issue to find that more portfolio companies are receiving sustainability inquiries from their biggest customers, which Miller says GPs are not always aware of. Instead these inquiries are learned about on an anecdotal basis, through a portfolio company reporting system that may not detail the information or because portfolio executives end up asking for help in how to respond.
“Even though there’s not yet a systematic approach in place for managing these sustainability inquiries, all GP participants in our study have seen at least one of their portfolio companies receiving such an inquiry from one of their largest customers ,” says Miller.
Some firms, such as Kohlberg Kravis Roberts, are ahead of the curve on the matter. “Responsible supply chain management is a growing and important part of ESG efforts,” says Ali Hartman, one of KKR’s in-house ESG specialists.
KKR has a “Responsible Sourcing Initiative” in partnership with Business for Social Responsibility (BSR), a non-profit that promotes responsible business practices to create a more sustainable world. Hartman says GP partnerships with third party advocacy groups, including BSR, have been growing as GPs look to execute on additional ESG objectives.