ESG in Private Equity: Value Creation, Misperceptions and Solutions | Jeff Cohen | SASB Standards

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© SASB

INTERVIEW with Jeff Cohen, Director of Capital Markets Integration

| SASB recently published a paper to support private equity (PE) investors looking to evaluate or integrate ESG considerations into the management of a private equity fund lifecycle. Could you please comment on how investors can benefit from SASB Standards in this regard?

Given SASB Standards’ sharpened focus on the subset of ESG issues most closely tied to a company’s ability to protect and create long-term value, the Standards can serve as a useful starting point—and, a foundational cornerstone—in building an effective, tailored approach to ESG integration. SASB Standards can be useful in every phase, from pre-investment due diligence, post-investment monitoring and risk assessment, to reporting —both from portfolio companies to general partners (GPs) and from GPs to limited partners (LPs). GP deal teams conducting due diligence on ESG factors likely to affect business strategy or operational efficiency in a given industry can leverage SASB Standards, which are well aligned with the UN Principles for Responsible Investment (PRI)’s guidance. Using the Standards, deal teams can undertake both bottom-up and top-down assessments to determine whether a target company is similarly affected by the ESG-related opportunities contributing value to industry peers at the top line (business strategy) or at the bottom line (business efficiency). Post Investment, GPs can convey the connection between ESG and enterprise value to portfolio company management, to more readily dispel misconceptions that ESG reporting is a costly add-on exercise lacking real value, and instead focusing on a refined, value-added set of factors that can be managed to improve the business. The cost-effectiveness of the Standards is enhanced by the fact that they are streamlined by design—including, on average, just six ESG disclosure topics per industry—and well-aligned with many other reporting initiatives that companies may already have committed to.

 

| What are the key differences between the SASB Standards and other reporting frameworks that PE investors could potentially use? 

It is important to distinguish between different types of resources available to PE investors and the important roles that standards, frameworks and coalitions play in the ESG ecosystem.  Coalitions such as the PRI and Impact Management Project (IMP) help build mutual understanding among the global investment community of the interrelationships between economic, social, and environmental systems and their implications for financial risk and return. They disseminate information to support organizations in identifying and addressing common challenges. Frameworks such as the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the International Integrated Reporting Council (IIRC) establish useful conceptual schema for identifying and evaluating the ESG-related risks and opportunities businesses face, as well as the positive and negative impacts their operations may have on the world.  Finally, standards, such as those developed by SASB, provide specific requirements for the disclosure of ESG information, empowering decision makers with consistent, comparable, reliable data.

 

SASB specifically focuses on financially material and industry specific ESG factors. Other standards, such as those provided by the Global Reporting Initiative and the GHG Protocol can also be useful tools for private equity investors focused on broader set of stakeholders or societal and environmental outcomes irrespective of their financial relevance.  

 

 Additionally, there are great resources provided from within the Industry such as British Private Equity and Venture Capital Association (BVCA), Responsible Investment Toolkit and the Commonwealth Development Corporation Group (CDC Group or CDC), ESG Toolkit for Fund Managers.

 

| One of the major challenges faced by investors is combining ESG best practice standards with various sector, company, portfolio, and other specific requirements as part of the ESG integration process. What flexibility opportunities does the SASB reporting framework provide to PE investors?

SASB Standards need not be prescriptively applied by GPs at any phases of the fund lifecycle. We encourage flexible application to ensure that the operating context of individual businesses are considered. This will allow appropriate prioritization of factors to be embedded in various phases of the process, thus adapting to the unique circumstances of the nature of the deal dynamics and business model.

 

| In her latest publication on ESG in PE, Prof. Claudia Zeisberger highlighted that ‘much of what appears to be happening is still immature and more theory than established best practice. So, the question of whether current ESG investment practices are more sizzle than steak is a fair one.’ What are your thoughts on this, and what steps do you find crucial to improve the ESG integration in PE? 

Professor Zeisberger’s observation is certainly a fair one if sizzle is meant to imply GP internal policy development, marketing, and communications by GPs on ESG Integration with steak reflected as genuine integration of ESG factors in investment decisions, post-investment value creation strategies and reporting of material KPIs.  These dynamics are observed in recent surveys including Pitchbook’s 2020 ESG Survey that found that only 25% of GPs surveyed require portfolio companies to reporting Material KPIs. Similarly, a 2019 PWC Survey found that of the various activities where GPs can leverage ESG, those lagging furthest behind are integration through the deal cycle, valuation of ESG performance, and incorporation into investment decisions and pricing. All this said, the steps being taken forward are still genuine, and what’s holding back deeper integration has historically been a lack of education as to the relevance of ESG to financial performance and misperceptions that integration is an overly costly and burdensome endeavor on both GP staff and portfolio companies.

 

SASB Standards by their very design provide evidence of the connection to financial performance and are intended to be non-prescriptive in application and cost-effective to implement. GP’s who overcome these preconceived notions and take a holistic approach to ESG are best positioned to design internal capabilities that puts more ESG meat on the bones of their process.

 

| How would you assess the role of ESG reporting frameworks in value creation in asset management?

Reporting frameworks in general suffer from the misperception that they are reporting for reporting’s sake when in reality they are designed to reflect the flow of information to facilitate management of what gets measured. Different frameworks and standards advocate for reporting of different metrics based on their definitions of materiality and stakeholders which they are designed to serve.  In the case of SASB, the Standards are designed to serve companies and investors in managing and assessing ESG factors that affect the financial condition and operating performance of a company. In this regard, reporting can generate valuable insights and demonstrate strategic initiative reflecting managerial expertise to position the business to account for these factors.

 

 

| brief bio

Jeff Cohen is the Director of Capital Markets Integration at SASB. In his role, Mr. Cohen educates and partners with institutional investors and asset owners, facilitating dialogue on financially material, industry-specific ESG topics and metrics for implementation into investment decisions across asset classes. Prior to joining SASB, Mr. Cohen was Head of Business Development at Sonen Capital, an ESG & Impact dedicated OCIO and fund manager. Prior to Sonen, he was a Director of Investment Opportunities at Venovate where he led due diligence on alternative investment strategies ranging from timber, real estate, hedge funds, and secondary strategies. Mr. Cohen has spent his career working with sophisticated investors at organizations such as Deutsche Bank, Merrill Lynch, and Gerson Lehrman Group. He holds an MBA from Georgetown University and a BBA from the University of Michigan. Mr. Cohen is a CAIA Charterholder and FSA Credential Holder.

 

| about

The Sustainability Accounting Standards Board (SASB) connects businesses and investors on the financial impacts of sustainability. SASB Standards enable businesses around the world to identify, manage, and communicate financially material sustainability information to investors. SASB Standards are industry-specific and are designed to be decision-useful for investors and cost-effective for companies. They are developed using a process that is evidence based and market informed. To download any of the 77 industry-specific standards, or learn more about SASB, please visit SASB.org.