How ESG Impacts Investor Relations

The practice of quantifying ESG for investors is very much in the nascent stages, but poised to have a large impact in the coming years

Bronwyn Bailey, American Investment Council: Daniel, how is Clayton, Dubilier & Rice  implementing ESG? 

Daniel Jacobs, CD&R: We have about 20 portfolio companies and we try to look at ESG in the same way that we look at anything that might have impact on the long-term performance and value of our portfolio companies. It comes very naturally to help to frame up what we’re trying to accomplish and we try to do that in each company.  

Bailey: How long have you been reporting on ESG to your LPs? 

Jacobs: We established an ESG policy in 2009 and our reporting has incrementally improved ever since. 

Kate Ahern, Bain Capital: We work with each of our companies on an individual level to understand what’s material to their business when we’re thinking about ESG. I think everyone would say that we’ve been doing reporting [to LPs] on various elements that are material forever … and just in the last few years, starting to report on “here’s this in the ESG context and here’s why it matters.

Esther Rombaut, CVC Capital Partners: The perspective that we had coming to ESG, [was] really thinking about it from a due diligence standpoint at the underwriting level before we got into a situation to think about what could be not only the financial impact, but the reputational impact of making a decision with poor ESG considerations.

Bailey: What are your LPs asking you for in terms of reporting? 

Jacobs: We found that there’s certainly been a huge increase in the demand for information around ESG from our LPs. We raised [a fund] about four years ago and about 25 percent of the capital that we raised was connected to some form of ESG inquiry. Fast forward to today, we’ve at least doubled that. They really want to know our exposure and process for managing that. 

Ahern: It’s been interesting to see the additional requests by geography. We’ve started to receive a lot more requests for information on governance and corruption and security deed in Asia, for example, but it’s become a real issue. We’ve received a lot more questions about diversity in the United States. I think we’ll continue to see the corruption and data privacy expand in Asia. 

Rombaut: We saw it in [the Nordic countries], not surprisingly, and with the Dutch investors, and then we are starting to see some U.S. public pension plans having ESG focused requests, as well as Asian sovereigns, which is a bit of a surprise based on historical experience with them. What’s startling to me is … our base of investors is about 300 LPs. I would say at least half of those have ESG-related questions, but primarily in the context of a fundraise.

Bailey: Do you know how the LPs are using information beyond due diligence? 

Jacobs: We’re very low-tech in this regard. The information that we’re collecting from our portfolio companies really starts when we’re making an investment and we survey the CEO of the company, get a feel for their level of engagement around ESG.

Rombaut: We work with the management teams and some external consultants to try to create that framework. We have very little by way of internal resources that can drive that, despite being a very large firm. 

Bailey: Is there some information that’s more relevant?  

Rombaut: We are generalists. You can’t have a given template that you just roll out to any business because everything is pretty much different. 

Bailey: Any challenges you’ve encountered collecting the information?  

Rombaut: I think we are at least four or five years away from having quantifiable data and, for us, that has to do with the diversity and the breadth of the portfolio. 

Ahern: We’re learning as we go a little bit and I think all of us feel like we’re building the plane as we’re flying it on ESG. And, honestly, folks have been so helpful in helping us to sort of do a refresh on ESG, as well. 

Jacobs: We’re in the early innings of a long game. But in the last few years, the industry has made tremendous progress—it’s fantastic, but we’re still early.