Integrating ESG into the Investment Process
Screening
Identification of ‘no go’ issues (e.g. irremediable breaches of the exclusion list or a company’s unwillingness to address key ESG issues).
An understanding of the key ESG factors that could impact (positively or negatively) the investment, the DD process and/or the fund manager’s reputation.
Inherent E&S risk categorisation.
Preliminary view of a company’s commitment and ability to address ESG factors.
Plan and budget for DD.
ESG section in the screening memorandum prepared by the fund’s deal team for the investment committee.
Due Diligence
A record of the DD process.
Report/document containing DD findings, including key ESG risks, impacts and opportunities, view on the company’s CCTR and any gaps against applicable standards.
Where appropriate, ESG action plan(s) agreed with management to address any gaps and/or materialise ESG opportunities.
Summary of the key DD findings for the IC paper.
Investment Decision
The IC minutes including ESG matters discussed and any related decisions made (e.g. conditional approval subject to the company fulfilling ESG conditions precedent prior to investment).
If legal negotiations between the fund manager and company materially fail to achieve the desired outcome as described by the investment paper/report or requested by the IC, the deal team should revert to the IC with the company’s counter proposal.
Where the IC has granted conditional approval, ensure that conditions or outstanding actions and/or documentation have been completed/attained and reviewed prior to drawdown.
Investment agreements
Shareholder’s agreement or equivalent that includes appropriate ESG clauses and clearly outlines how ESG matters will be handled during the life of the investment in order to meet the fund’s requirements and expectations.
Ownership & monitoring
Greater value of each company partly due to the fund’s influence on and support provided to the company.
Fund managers and LP’s ongoing and appropriate oversight of each company’s ESG performance.
Compliance with fund’s ESG policies and related standards.
Responsive and effective management of unplanned events (e.g. serious accidents).
Good stakeholder relations, including companies and LPs.
Records to demonstrate good ESG performance and compliance with the fund’s policies.
Exit
Typically, fund managers prepare a detailed financial model to arrive at a valuation when selling its portion of the company. The following ESG documentation may be used to develop and justify the financial model:
Monitoring reports that track the ESG performance of the company (e.g. an ESG action plan and KPIs). These are likely to have been prepared on a regular basis during ownership, and key issues should be summarised with important progress highlighted.
Quarterly/annual reports prepared by the company for the fund manager, as well as public reports such as sustainability reports.
Reports on serious accidents, incidents or fatalities over the life of the investment together with the remedial actions implemented.
All relevant ESG permits, licences, accreditations or certifications, including any records of fines for non-compliances and associated remedial action.
Evidence of an effective ESG management system, including minutes of company meetings at which ESG is addressed (board or management committee), policies and operational procedures.
Any certifications to ESG standards, particularly internationally recognised industry benchmarks.