Responsible Investing and ESG
Investing responsibly today for a sustainable tomorrow
Increasingly, investors are demanding high standards from companies in relation to sustainability and societal impact. These standards, which include climate change, diversity and corporate ethics, are commonly covered by the term Environmental, Social and Governance (“ESG”). While definitions vary, ESG is used to help evaluate a company or organisation’s progress against key criteria.
There is often a misapprehension that ESG factors are not regarded as important in private equity investment. However, this could not be further from the truth. Pantheon believes that the consideration of ESG risk forms part of general risk management and effective mitigation of such risks strengthens downside protection and enhances a company’s reputation. In fact, it is Pantheon’s view that the implementation of sound ESG practices can have a material impact on value creation in private equity.
As a result of Pantheon’s approach and with the full commitment of the Board, ESG is at the core of PIP’s investment philosophy with ESG factors incorporated into the entire investment process. This starts with the initial due diligence and assessment of the suitability of a fund/company for inclusion in PIP’s portfolio. But it does not stop there. There is also an extensive ongoing monitoring programme which comes into play after an investment has been made.
Pantheon’s dedicated ESG Committee is comprised of senior individuals from its Investment, Risk and Investor Relations teams. As part of its duties, the Committee sets Pantheon’s ESG strategy and policy, and provides feedback across the business and to external stakeholders.
We have seen that incorporating ESG into our investment process is not only the right practice by our planet and people, it is also good for business’
Partner, European Primary Investment and member of ESG Committee
ESG is in Pantheon’s DNA
While many parts of the investment world are being redefined through the lens of responsible investing, Pantheon has a history of being fully engaged with ESG matters. From working with managers backing businesses with a clear social mission to persistent industry advocacy, Pantheon has relentlessly sought to promote and demonstrate its commitment to the ESG agenda in private equity.
The bar was set when Pantheon became one of the first private equity signatories to the UN-backed Principles for Responsible Investing (PRI) in 2007. The PRI is the world’s leading proponent of responsible investing and is underpinned by six principles that signatories commit to uphold. These are:
We will incorporate ESG issues into investment analysis and decision-making processes.
We will be active owners and incorporate ESG issues into our ownership policies and practices.
We will seek appropriate disclosure on ESG issues by the entities in which we invest.
We will promote acceptance and implementation of the Principles within the investment industry.
We will work together to enhance our effectiveness in implementing the Principles.
We will each report on our activities and progress towards implementing the Principles.
As an engaged and active supporter of the PRI, Pantheon has fully embedded the six principles into its investment approach, strategy and ethos, and each year is required to report on progress against these principles.
In 2009, Pantheon joined the PRI Steering Group, an influential position helping to shape the PRI’s work and in 2015, Pantheon was awarded A+ in the PRI’s first formal assessment.
A history at the forefront of ESG
Signed up to the Principles of Responsible Investment (“PRI”)
Established an internal ESG working group
Joined the PRI Steering Committee
Successfully integrated the Principles into our investment processes
Ranked in the top quartile for all six Principles of the PRI
Implemented pioneering reporting to clients on ESG
Adopted ESG Disclosure Framework
Enhanced our ESG Reporting for Clients
Awarded A+ in UNPRI’s first formal assessment i
ESG reporting 2.0
Joined PRI Private Equity Advisory Committee (PEAC)
Integration of Reprisk into our due diligence processes
Winner of ESG/SRI Manager of the Year at the Pensions Expert Pension and Investment Provider Awards
Awarded A+ for Private Equity
Showing leadership through industry advocacy
A core pillar of Pantheon’s leadership in ESG is through industry advocacy. It does this in a variety of ways including:
Working with private equity trade associations to advocate ESG amongst our private equity managers through seminars and workshops.
Contributing to a number of UNPRI guidelines and those created by some regional organisations.
Through our role at the Hong Kong Private Equity and Venture Capital Association, setting up a biennial ESG Award of Excellence in Asia, the first of its kind in the region.
Pantheon believes that its efforts are making a real difference in raising ESG standards across the private equity industry.
ESG in action
In considering a new fund commitment, Pantheon’s due diligence process ascertains the extent of the private equity manager’s willingness to adhere to sound ESG practices, favouring those managers who understand the nature of ESG risks and who seek to minimise them. PIP’s objective is to generate competitive risk-adjusted financial returns and we believe that by embracing ESG in its investment approach, Pantheon helps to support that aim.
Pantheon’s systematic approach to ESG during investment due diligence
Ahead of any investment, a strict ESG assessment is undertaken by Pantheon and specific steps are followed to generate an overall ESG rating for the given investment opportunity.
For primaries – an investment into a manager’s fund when it is being raised – private equity managers are required to complete a detailed questionnaire. Through carefully targeted questions, Pantheon gathers significant amounts of information about how a private equity manager operates and how it scores on a range of ESG factors.
The result is that Pantheon has a deep understanding of the ESG strengths and weaknesses of each investment opportunity. This is formalised with each opportunity given an overall ESG rating.
How ratings are categorised
The ESG rating and supporting documentation are provided to Pantheon’s Investment Committee as part of the decision-making process for the overall investment opportunity.
Not having a green rating does not automatically indicate a lack of intention to incorporate ESG but may be due to:
- A private equity manager being recently formed
- Not having had the time or resources to put in place an ESG policy
- Not having seen the benefits of ESG as awareness and adoption of ESG principles typically varies across regions.
Often this presents an opportunity for Pantheon to actively engage, talk and share best practice with the manager. As time passes, through engagement, most managers can be migrated to the green rating.
During the year to 31 May 2020, among the 13 primary commitments made by PIP, the majority received a green rating with the remainder receiving an amber rating.
Some of the questions we ask…
Do you have a formal approach to integrating ESG factors within your investment process?
Have you signed the UNPRI or adopted any other ESG-related standards?
Does your investment process include monitoring climate change related regulation?
Do you include reporting on ESG risks that arise in the portfolio company to your advisory board / or in your quarterly reporting to Limited Partners?
How do you engage with portfolio companies on ESG issues?
Who within your organisation is responsible for taking ESG considerations in your investment decisions?
Due to the nature of secondaries and co-investments, Pantheon has visibility of the underlying companies in those funds or investments. This allows Pantheon to build up a detailed picture of the ESG credentials of the specific companies in the portion of the fund under consideration or – in the case of co-investments – apply rigorous due diligence to take into account potential ESG risks to which the company may be exposed. Pantheon also assesses the private equity manager’s plans for mitigating these risks.
Ongoing active portfolio monitoring
Pantheon understands that its responsibility and influence extends far beyond the point of investment, which is why it actively undertakes extensive ongoing portfolio monitoring after an investment is made.
Practically, this means underlying portfolio companies are monitored in order to identify ESG risks or issues. Pantheon does this on PIP’s behalf through RepRisk, a highly innovative business intelligence service that was fully integrated into Pantheon’s monitoring processes in 2017.
RepRisk’s rapid service provides live alerts and intelligence on issues affecting portfolio companies. Acting upon this information, Pantheon logs any incidents and follows up on any material issues with the relevant manager. Pantheon is able to open a two-way dialogue with its managers to understand the background, the accuracy of the reporting and find out how identified issues will be dealt with. It is this detailed, collaborate and active approach that ensures Pantheon stays informed of ESG issues, while also building better relationships with its private equity managers.
During the year to 31 May 2020, incidents in companies accounting for around less than 1% of PIP’s NAV required follow up with the private equity manager. In all cases, Pantheon was satisfied that the correct action had been taken where necessary and that the issue did not betray systematic underlying process issues.
This level of engagement powerfully demonstrates how addressing ESG issues can create value and that being active on ESG makes moral and commercial sense.
Responsible investment in action
There are several examples in our portfolio which highlight our approach to responsible investing.See case studies
On all key issues, including diversity and inclusion, environmental impact and employee culture, PIP’s investment manager, Pantheon, has specific plans delivering tangible results.
Employee culture based on diversity and inclusion
Pantheon passionately believes that improving diversity and inclusion is the right thing to do, which is why we have set specific targets for furthering gender and racial diversity among employees. Pantheon has purposefully created an employee culture based on respect, inclusivity and integrity. This foundation means employees can thrive and contribute effectively to the success of PIP.
Signatory of UK Government’s Women in Finance Charter
40% of employees are women (Pantheon, 2020)
Committed to developing a global workforce that reflects the people Pantheon serves
Pantheon is committed to increasing diversity and inclusion in private equity. This includes initiatives such as Level 20, a not for profit organisation whose mission is to improve gender diversity in the European private equity industry. Level 20 was co-founded by Helen Steers, Pantheon Partner and manager of PIP, in 2015.
Find out more about Pantheon’s approach to Corporate Responsibility, ESG and Employee Engagement here.
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