Q. How do you embed ESG into the investment process?
Maruping Mangwedi: It starts by linking the ESG approach to investment strategy—accepting that you can't consistently deliver the returns you're hoping for without doing that. For example, since the start of this year, our ESG committee has taken part in the firm's monthly portfolio management committee meetings and undertakes a deep dive on the portfolio to monitor ESG performance.
We know what questions to ask because ESG is part of our due diligence program before any transaction proceeds. We'll agree and document an ESG plan and put contractual undertakings into deals—and perhaps a 100-day strategy. Our monthly meetings are an opportunity to test the portfolio businesses against those plans.
Ivo Philipps: We typically invest in a company for five to seven years and ESG issues will develop and change during that period. But if you don't take ESG seriously from the start, and invest with an ESG mindset, it won't happen. Then, when you come to the exit, buyers will take one look and identify those shortcomings.
Q. What sort of systems and policies does that require?
Ivo Philipps: It requires a governance structure and a systematic approach; that's why we operate with the committees and the due diligence policies that we've put in place. But we should recognize that some of this is about language. Often, we're asking our businesses to talk about something they've been doing for years but haven't thought about in an ESG context, or to collect the data that enables us to assess it.
Maruping Mangwedi: It really helps to be proactive at the start of a transaction, which means that the policies and structures are in place, but that you also need the deal team to engage with the management team, setting out what those policies mean and what's expected.
Sometimes people think something can't be done; then you link to the actual business plan and the picture becomes clearer. We're very focused on why the ESG factor in question is so significant. Yes, it's the right thing to do, but also it may impact your supply chain, or your carbon emissions are going to become more expensive.
Q. So it's about value as well as risk?
Maruping Mangwedi: I think it's crucial to have a multidisciplinary approach. Some of the pain points in ESG occur when there's a compliance-heavy approach; the relationship between the ESG committee and the deal teams can become acrimonious.
In our case, no deal can get through our investment committee unless the ESG committee has signed off on it, but our primary focus is on robust ESG integration. There is a risk assessment and that's important, but there also must be a plan for how we intend to proceed with ESG and why.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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