2013 pe esg survey

8/13/2019 2013 PE ESG Survey

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ENVIRONMENTAL | SOC2013 PE ESG

LPs care moreabout ESG issuesthan ever before.PAGE 13

KKR and DoughtyHanson named ESG

leaders in 2013.PAGE 15

European firms arefar ahead of theU.S. in adoptingESG programs.

PAGE 6

What factors driveESG efforts at the

firm level? PAGE 7

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Table of ContentsIntroduction

Participant StatisticsESG Programs at PE Firms

ESG at Portfolio Companies The LP Point of View

Industry Leaders

456-1011-1213-1415

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Data AnalysisPeter Fogel - Senior Data Analyst

ContributorKirk Hourdajian - Sustainable BusinessSolutions, PwC

Contact PitchBookwww.pitchbook.comResearch - [email protected] - [email protected] - [email protected]

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8/13/2019 2013 PE ESG Survey


IntroductionWhen we conducted our inaugural environmental, social and governance (ESG) survey of private equity (PE)professionals last year, it was startling to see that nearly half (49%) of our general partner (GP) respondentsdid not have an ESG program at their rm and had no plans to create one, despite heightened concern fromlimited partners (LPs) on ESG issues. What a difference a year makesnot to mention the fact that we had ahigher proportion of European respondents this year, who are much more progressive when it comes to ESGissues. In our second edition of the ESG survey, a majority of GP respondents (60%) now work at a rm withan established ESG program and another 26% either have an ESG program in development or plan to createone in the near future. However, there are still some PE rms that see little value in ESG programs. As one GPrespondent put it: we think [ESG] is the most asinine initiative ever to come out in the business world.

While some PE rms eschew ESG issues and think that strong fund performance is enough to attract LPcommitments, the LPs themselves are telling a different story. Eighty-four percent of LP respondents saythat ESG issues are at least somewhat important when deciding whether or not to commit to a PE fund,

with 18% claiming they are essential. Furthermore, 24% said they would they would commit to a fundwith slightly lower historical performance if the rm had a strong ESG program. Remember, many of thelargest contributors to PE funds are public pension plans, endowments, foundations and sovereign wealthfundsinstitutions which not only are interested in returns but also have an image to maintain. GPs haveto be more aware of investors desire for knowledge of their investments beyond just the nancial return,commented one LP respondent, while adding that the responsibility ultimately falls on the investors: GPswill only change if the LPs push them to.

One of the big takeaways from this years survey is that more PE rms are taking the necessary steps tomake ESG a fundamental part of their investment approach. For example, 28% of GP respondents indicatedthat their rm produces a corporate social responsibility (CSR) report, up from 18% in 2012. And whilending effective metrics to monitor ESG performance continues to be the largest hurdle for ESG efforts, PErms continue to nd new ways to measure their ESG initiatives and have increasingly utilized forums, case

studies and industry events and guidelines to ll the knowledge gap.

We hope that this survey serves as a lens into the current state of ESG issues in the PE industry and providesa starting point for developing a set of best practices that can be adopted by rms of all sizes. If you areinterested in participating in future editions of the survey, or have any comments or suggestions for howwe can improve this report, please contact us at [email protected] .

What is ESG?

CSR: Corporate Social ResponsibilityEDF: Environmental Defense FundGIIRS: Global Impact Investing Rating SystemPEGCC: Private Equity Growth Capital CouncilPRI: Principles for Responsible InvestmentILPA: Institutional Limited Partners Association

Environmental: waste, water, electricity,transportation fuel, toxic chemicals, paperSocial: diversity, human rights, supplychain, employee engagement

Governance: policy, managementstructure, board-level oversight

8/13/2019 2013 PE ESG Survey


16

4

11 11

6

15

8

13

16

2

0

2

4

6

8

10

12

14

16

18

$5B N/A

Our GP respondents showed a much higher levelof ESG awareness than they did last year, which isto be expected with the increased focus on ESGissues exhibited by LPs, industry organizations andgovernmental bodies. But a bigger factor is thatthere was a much higher proportion of Europeanrespondents in this years survey. As will become

evident throughout this report, European investorsplace a much greater importance on ESG issues thaninvestors from other regions.

Number of GP Respondents by AUM Number of LP Respondents by AUM

1 02 2 1

32

14

6

20

0

5

10

15

20

25

30

35

$100B N/A

28

39

23

14

3

00

1

# of GP Respondents

# of LP Respondents

Participant Statistics

Source: PitchBook

2013

2013

38

2

2012

9

2

2012

0

0

20122013

2013

1

0

2012

2012 2013

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Why are PE rms paying more attention to ESG?

Given the fact that PE rms are concerned with theprotability of their investments rst and foremost, itseems somewhat odd that environmental and socialconsciousness continues to rank signicantly higherthan cost management and operational efficiencyas a driver of ESG programs. It would appear that PErms are not as incessantly focused on the bottom-

line as they are typically characterizedor perhapsrespondents are simply more inclined to displayhigh-minded ideals when being surveyed.

One factor directly related to the success ofPE investments that did rank highly was riskmanagement, with 64% of GP respondents citing itas a contributor to their ESG efforts, up from 55% in2012. This is corroborated by the fact that ESG issuesare considered most frequently during the duediligence process.

Unsurprisingly, LPs continued to be a top driver ofESG programs at PE rms, although the proportionof GP respondents that identied LPs as being afactor in their ESG efforts dropped slightly from74% in 2012 to 69% in 2013. With LPs being suchan important motivator for PE rms, and our GPrespondent base being fairly attuned to ESG issues,it is somewhat odd to see that ESG issues are onlytaken into consideration by 76% of PE rms duringthe fundraising process.

GP Q4: What factors drive your ESG efforts? (multiple choices permitted)

GP Q5: When do you consider ESG issues?(multiple answers permitted)

Its important that ESG management iintegrated with the overall managementof any business and not treated as a separate or somehow less important

activity driven only by external demand-Philip Rowland, Senior Operating Partner at TDR Capita

71% 74%

55%

63%

42% 42% 39%

29%34% 37%

16%

73%69%

64%60%

45%

36%31% 29%

24% 24%

11%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2012

2013

LPs Risk mgmt

Corporategovernance

Portfoliocompanies

Govtregulation

Employeeinterests

Costmgmt

Operationalefficiency

CompetitorsEnviron.& social

consciousness

Brand/image

0% 20% 40% 60% 80% 100%

Exit

Holding period

Due diligence

Fundraising

2013

2012

Source: PitchBook

Source: PitchBook

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0% 20% 40% 60% 80% 100%

Essential Very important Important Somewhat important Unimportant

Monitoring the successof ESG initiatives

Developing an ESG mgmtprogram at the rm level

Using industry guidelines

Engaging outsideESG experts

Outlining ESG philosophyin LP agreement

Requiring portfolio costo develop a CSR report

Hiring in-houseESG professionals

20132012

20132012

20132012

20132012

20132012

20132012

20132012

What needs to be included in an ESG program?GP Q6: How important are the following factors when developing an ESG program?

GP Q7: What is the biggest challenge for ESGprograms and initiatives?

In last years survey, GPs indicated that developingan ESG management program at the rm level wasthe most important factor when developing an ESGprogram. While GPs saw this as even more crucialin this years survey, monitoring the success of ESGinitiatives overtook it as the most important factor ofan ESG program, which makes sense with the highpriority that GPs place on metrics of all stripes. Butdespite this development, nding effective metricsto monitor ESG progress continues to be the biggestchallenge for PE rms. For rms that need guidance inthis regard, a rundown of some of the most popularsystems and resources currently available for gaugingthe ESG performance can be found on page 12 .

Amazingly, only 19% of GP respondents found itto be very important or essential to outline their ESGphilosophy in limited partnership agreements, despite76% of rms claiming to consider ESG issues duringfundraising. If a PE rm is going to invest the time andresources into an ESG program, why wouldnt theywant to make those efforts explicit to their investors?

Cost was identied as the biggest challenge to ESGefforts by roughly one in ve GP respondents in 2012but cited by just 7% of respondents this year. Severalfactors likely led to this decrease, such as more readilyavailable resources to assist in ESG efforts and the factthat ESG programs can actually lead to cost savings.

Many GPs expressed the desire for indu groups to provide more guidance and standardized benchmarks for ESG metrwhich should lead to higher prioritizatioof ESG issues by both GPs and LPs.

42%

24%

18%

7%9% 43%

38%

7%

7%5%

Cost

Employee

Other

Implementation

Effective metricsto monitor

performance

participation

2012

2013

Source: PitchBook

Source: PitchBook

8/13/2019 2013 PE ESG Survey


How to share your rms ESG story

Creating the CSR ReportWho

The audience for a PE rms CSR report willobviously vary depending on the rms size andlevel of public visibility, but the most crucialaudience for all PE rms will no doubt be LPs.For rms that put in the effort to develop an ESGprogram, it is imperative to clearly articulate whatthe program is accomplishing to both current and

potential investors. The CSR report is the idealformat for this and should include everything fromhigh-level ESG philosophies to specics on howESG performance is measured and how it impactsthe rms investments.

What

The actual content of the CSR report will vary fromrm to rm, but there needs to be substance. PErms that include quantitative results in their CSRreport differentiate themselves from those that

simply have nice photos. Key details all rms shouldconsider in their CSR report include:

Objectives of the ESG program General approach to ESG issues How ESG performance is measured Updates on specic ESG initiatives at both

portfolio companies and the rm itself

When and Where

Most rms produce a CSR report on an annualbasis, but LPs appreciate a high level ofcommunication from their GPs. As such, it wouldalso be wise to include ESG updates in quarterlyreports. Making the CSR report easily accessiblyonline allows potential future investors, acquisitiontargets, media outlets and other interested partiesto see the rms commitment to ESG issues.

GP Q8: Does your rm produce a corporate socialresponsibility (CSR) report?

The CSR report not only articulates a rms ESGprogram to outside parties, but also underscoresthe importance the rm places on ESG issues andhighlights successes to people within the rm. Thepercentage of PE rms with a CSR reporta hallmarkof a well-established and mature ESG programexpanded from 18% in 2012 to 28% in 2013. In thefuture, more PE rms will likely allocate the resourcesnecessary to produce the CSR report as their ESGprograms become more mature.

Examples of CSR Reports

All PE rms will take a different approach when itcomes to crafting the CSR report. Some produceit as a standalone publication while othersincorporate it with their annual review. Here aresome examples of how the top PE rms share theirESG stories:

KKR: 2012 ESG and Citizenship Report

Carlyle: Corporate Citizenship

CalPERS (LP): Towards Sustainable Investment

0%

20%

40%

60%

80%

100%

2012 2013 NorthAmerica

Europe

Yes

No

Source: PitchBook
http://www.kkr.com/_files/pdf/KKR_ESG-Report_2012.pdfhttp://www.kkr.com/_files/pdf/KKR_ESG-Report_2012.pdfhttp://www.carlyle.com/sites/default/files/TCG_CCR13-final.pdfhttp://www.calpers.ca.gov/eip-docs/about/press/news/invest-corp/esg-report-2012.pdfhttp://www.calpers.ca.gov/eip-docs/about/press/news/invest-corp/esg-report-2012.pdfhttp://www.carlyle.com/sites/default/files/TCG_CCR13-final.pdfhttp://www.kkr.com/_files/pdf/KKR_ESG-Report_2012.pdf

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Staying current with ESG developments

GP Q9: How do you stay abreast of developmentsin ESG? (multiple answers permitted)

GP Q10 & LP Q1: Which ESG-related groups or programs do you belong to, endorse or participate (select all that apply)

ESG Groups & ProgramsPRI: Developed by a group of international institutional investors in conjunction with the United Nations, the PRI is a set ofsix principles that guide the investment decisions for more than 1,000 signatories.

PEGCC Guidelines for Responsible Investment: PEGCC, the main lobbying group for the PE industry, developed itsGuidelines for Responsible Investment through a collaboration with institutional investors around the world and the PRI. TheGuidelines serve as a starting point for PE rms that are developing ESG programs.

ILPA Private Equity Principles: Endorsed by more than240 investors, the ILPAs Private Equity Principles providea blueprint for GPs and LPs to align their ESG efforts.

ESG Disclosure Framework: Over the course of 16months, a group that included 20 PE associations, 10prominent GPs and dozens of LPs from 11 countriescame together to create the ESG Disclosure Framework.Published earlier this year, the document is centeredaround ESG disclosures in PE investments, outliningve objectives relating to fund due diligence and threepertaining to disclosures during the life of the fund.

PEI Responsible Investment Forum: The forum,which is co-hosted by the PRI, informs PE rms on ESGstrategies that can be employed to develop betterportfolio companies.

53%

35% 33%

16%12%

7%14% 16%

50%

30%

2% 4% 0% 0%

15%

30%

0%

10%

20%

30%

40%

50%

60%

UN PRI ILPA PEPrinciples

PEGCCResponsibleInvestmentGuidelines

EnvironmentalDefense Fund

GlobalReportingInitiative

Business forSocial

Responsibility

Other None

GPs

LPs

We dont

In-house experts

Outside consultants

Forums, case studies& industry events

Industry guidelines

Independentresearch

0% 20% 40% 60% 80%

2013

2012

Source: PitchBook

Source: PitchBook

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ESG at Portfolio CompaniesGPs see ESG becoming more critical in operations

GP Q12: How important are ESG issues whenimplementing operational improvements at aportfolio company?

GP Q11: How important are ESG issues whenexiting a company via __________?

PE rms have changed their tune in the last year whenit comes to utilizing ESG initiatives at their portfolio

companies. Thirty-one percent of GP respondentsthis year said that ESG issues were essential or veryimportant when looking to improve portfolio companyoperations, compared to just 18% in 2012. EuropeanGPs were much more inclined to nd ESG issues to bean important factor in portfolio company operations,with 86% saying they were at least important.

With the scrutiny that comes with being a publiccompany, GP respondents found ESG issues to besignicantly more important for companies beingexited via IPO as opposed to a sale to corporate

acquirer or another PE rm. ESG issues were found tobe least important when selling to another PE rm,which was somewhat surprising given the relativelyhigh level of ESG focus and awareness indicated fromrespondents throughout our surveyparticularlywhen performing due diligence.

Much of the effort around ESG programs centersaround initiatives that can cut costs, improve efficiencyand enhance the operations of the portfolio company,but philanthropic and volunteer programs are an

GP Q13: Do you have philanthropic and/oremployee volunteer programs at your portfoliocompanies?

ideal way to engage employees from across theorganization. To that end, more than half (52%) of GPrespondents encourage these types of initiatives atportfolio companies but hardly any (2%) make them arequirement.

0%

20%

40%

60%

80%

100%

Corporateacquisition

Secondarybuyout

IPO

Essential

Veryimportant

Important

Somewhatimportant

Unimportant0%

20%

40%

60%

80%

100%


Europe

Essential

Veryimportant

Important

Somewhatimportant

Unimportant

0%

20%

40%

60%

80%

100%

2012 2013

Yes; they arerequired

Yes; they areencouragedbut notrequired

No

Source: PitchBook Source: PitchBook

Source: PitchBook

8/13/2019 2013 PE ESG Survey


How do GPs monitor ESG at portfolio companies?

International Organization forStandardization (ISO)

Recognized as an international leader involuntary standards systems, ISO standardsaddress a vast array of ESG issues, includingenergy and environmental management andsocial responsibility. ISO develops its standards

through a consensus process that draws onexperts and industry professionals from aroundthe globe. The organization has published morethan 19,500 International Standards since itsinception in 1947.

Global Impact Investing Rating System (GIIRS)

Initiated as a project by B Lab, an independentnon-prot organization, GIIRS assesses the socialand environmental impact of both funds andindividual companies. GIIRS utilizes third-partydocumentation and ratings methodologiesdeveloped by an independent Standards Board.One of the biggest advantages to using a third-party system is that it addresses the diverse natureof companies and funds by evaluating them on arange of criteria pertaining to specic industries,impact areas and investor preferences.

Impact Reporting and InvestmentStandards (IRIS)

Developed by the Global Impact InvestingNetwork (GIIN), IRIS is a catalog that offers

standardized metrics that can be employed tomeasure social, environmental and nancialperformance. Some of the specic variables thatIRIS can help quantify include: governance, socialpolicies, employee training, greenhouse gasemissions and biodiversity.

Commonly usedESG rating systems

GP Q15: Do you require portfolio companies todevelop a CSR report?

GP Q14: Do you require portfolio companiesto use a systems approach to manageenvironmental performance?

Our next initiative around awareness isbringing our portfolio companies togetherto share best practices in ESG, discuss the

issues and opportunities and re-conrm ourexpectations for management of this area.

-Philip Rowland, Senior Operating Partner at TDR Capital LLP

0%

20%

40%

60%

80%

100%


Europe

Yes; ISOcerticationrequired

Yes; othertype of certication

No

0%

20%

40%

60%

80%

100%


Europe

Yes

No; butcurrentlyworkingtowardsit

No

Source: PitchBook

Source: PitchBook

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The LP Point of ViewLPs care more about ESG issues than ever beforeLP Q2: How important are ESG issues whenevaluating a GP and deciding to commit to a fund?

GP Q16: How important are ESG issues whendrafting limited partnership agreements?

LP Q3: How has your focus on ESG issues changedin the last three years?

GP Q17: Have LPs expressed increased concernabout ESG issues in the last three years?

As was the case in 2012, LPs continue to indicate ahigh level of concern regarding ESG issues. The resultslargely mirror those from last year, but the LPs that

were simply interested in ESG issues last year arebeginning to view them as essential. Nearly one in ve(18%) LP respondents reported that ESG issues wereessential when evaluating GPs while last year not a

single LP fell into this category. European LPs, like theirGP counterparts, are particularly concerned with ESG;every European LP respondent said that ESG issues

were at least important when committing to a fund.GPs are more attuned to the ESG concerns of LPs

than they were last year, but there is still room forimprovement, with 27% of GP respondents saying

0%

20%

40%

60%

80%

100%


Europe

Essential

Veryimportant

Important

Somewhatimportant

Unimportant

0%

20%

40%

60%

80%

100%


Europe

Increased

Stayed thesame

Decreased

0%

20%

40%

60%

80%

100%

2012 2013

Yes

No

Source: PitchBook


0%

20%

40%

60%

80%

100%


Europe

Essential

Veryimportant

Important

Somewhatimportant

Unimportant

Source: PitchBook

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LP Q5: Why does ESG matter in your investmentdecisions? (multiple choices permitted)

LP Q7: Would you rather commit to a GP with no ESprogram but top quartile performance or a GP with astrong ESG program and slightly lower performance?

LP Q4: How do you expect your focus on ESGissues to change in the future?

LP Q6: What areas are you most concerned aboutwhen it comes to ESG? (limit three)

that ESG issues are unimportant when drafting limitedpartnership agreements.

Sixty-two percent of LP respondents say that theirfocus on ESG issues has increased in the last threeyears, with just one respondent saying that they areless concerned with ESG issues than in the past. GPsappear to be getting the message loud and clear. In2012, only half of GP respondents said that LPs hadexpressed increased concern over ESG issues, but that

surged to 77% in this years survey.Even though LPs have shown signicantly moreattention to ESG issues in recent years, 60% of LP

respondents said they will continue to increase theirfocus in the future. This should only serve to motivateGPs to build out their ESG programs even faster.

Environmental and social consciousness rankshighly among LPs as a motivator to address ESG issues,but they are also concerned with the risk prole oftheir investment and their brand and image. Corporategovernance, business integrity, and environmentalhealth and safety were the main concerns of LPs when

it came to specic ESG issues. Interestingly, Europeanwere much more inclined to care about social issues,which was their second highest concern.

0%

20%

40%

60%

80%

100%


Europe

Increase

Stayed thesame

Decrease

0%

20%

40%

60%

80%

100%

2012 2013

ESG program& lowerperformance

No ESGprogram &higherperformance

Source: PitchBook

Source: PitchBook

Source: PitchBook


0% 20% 40% 60% 80% 100%

2013

2012

It doesnt

Competitors

Corporate governance

Governmentregulation

Employee interests

Brand/image

Risk management

Environmental/socialconsciousness

Other

0% 20% 40% 60% 80% 100%

2013

2012Other

None

Resourcepreservation

Corporate governance

Business integrity

Social issues

Climate change

Environmentalhealth & safety

8/13/2019 2013 PE ESG Survey


Industry LeadersAs part of this years survey, PitchBook asked respondents to name some of the rms they viewed as leaders inESG practices. It was encouraging to see rms of all different sizes and from both sides of the Atlantic be named,but there were two clear industry leaders : KKR and Doughty Hanson. KKR was the most frequently namedleader in ESG practices in both this and last years survey, which is no surprise considering the rm initiated itsGreen Portfolio Program in 2008 and maintains an ongoing partnership with the Environmental Defense Fund.Doughty Hanson, a London-based European private equity rm, wasnt mentioned in last years survey, but wascited as a leader by several rms and LPs this year. Heres a look at what makes each rm so respected amongtheir peers when it comes to ESG issues:

KKR was the rm most frequently named as a leaderin ESG practices for the second year in a row. Therm launched its Green Portfolio Program in 2008 togenerate operational improvements at its portfoliocompanies. The program was created in partnership

with the Environmental Defense Fund and focusesits efforts on reducing emissions, electricity usageand other environmentally focused operationalimprovements. KKR estimates that through its rst veyears the program has generated $917 million in costsavings and additional revenue.

According to KKR, 25 companies have participatedand avoided more than 1.8 million metric tons of GHGemissions since the programs inception. Also includedon the Green Portfolio Program website are numerouscase studies and statistics that show the impact of

the rms ESG programs. For example, KKR portfoliocompany Oriental Brewery, which installed a modiedboiler system and optimized the fermentationprocesses in-house, reported that from 2008 to 2010,the company avoided $17.7 million in energy costsand 19 million cubic meters of water consumption.

KKR also operates initiatives at its portfoliocompanies to improve transparency, employee healthand sourcing practices and supply-chain risks.

Doughty Hanson has been active in ESG issues andpractices for several years and became the rst PEsignatory to the PRI in June 2007. The London-basedPE rm was also one of the rst to produce an ESG-focused report, partnering with the World Wildlife

Fund in 2011 for Private Equity and ResponsibleInvestment.On its website, the rm includes a list of ESG

policy items it seeks to achieve, a case study forone of its portfolio companies, details on its owncarbon neutrality efforts, and information on socialinvestment and charitable efforts.

As was the case for many of the GP respondentsto our survey, Doughty Hanson sees undertakingESG issues not as a burden, but as a way for therm and its portfolio companies to enhance value,

elevate the brand and reduce risks associated withpoor governance. According to the rm, the projectsit undertakes are: commercially driven and aredesigned to mitigate the nancial and reputationalrisks to which Doughty Hanson, our portfoliocompanies and our investors are exposed. They alsocreate additional opportunities to increase the valueof our portfolio companies, enhance their brandsand better position them for exit.

http://green.kkr.com

http://www.kkr.com/company/responsibility

http://www.doughtyhanson.com/responsible-investing.aspx

http://www.doughtyhanson.com/private-equity/esg-engagement.aspx
http://green.kkr.com/http://green.kkr.com/http://green.kkr.com/

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