Responsible investment is an approach to investment that explicitly acknowledges the relevance to the investor of environmental, social and governance (ESG) factors, and the long-term health and stability of the market as a whole. The United Nations-supported Principles for Responsible Investment Init… is an international network of investors working together to understand the implications of sustainability and to incorporate these issues into their investment decision making and ownership practices.
We have over 1380 signatories to the Principles, representing US$59 trillion of assets – that is over half of the world’s investible assets. In implementing the Principles, signatories contribute to the development of a more sustainable global financial system.
What kind of issues do PRI signatories investing in emerging markets seek advice on?
For investors to determine whether companies have strong, long-term investment potential, these companies must disclose information about their ESG practices. This information is needed by financial markets to value the impact of ESG on financial performance. In emerging markets, the most challenging issue for our signatories is the lack of comparable ESG data to enable them to assess companies when making investment decisions. That is why the PRI co-convened the Emerging Markets Disclosure Project which aimed to increase sustainability reporting among emerging markets companies through research and engagement activities.
What can private equity investors take away from this?
One of the main conclusions of the project was that local stock exchange listing and regulatory requirements are the most important drivers of sustainable reporting. To respond to this opportunity, the PRI helped develop the Sustainable Stock Exchanges initiative. This is a peer-to-peer learning platform for exploring how stock exchanges, in collaboration with investors, regulators and companies, can enhance corporate transparency – and ultimately performance – on ESG issues and encourage sustainable investment. 23 leading exchanges have joined this initiative and made voluntary public commitments to advancing sustainability.
This is particularly pertinent to private equity managers that are considering the initial public offering route (the first sale of stock by a company to the public) for portfolio companies in emerging markets. These managers are increasingly aware of the need to demonstrate adherence to ESG standards to meet the requirements of stock exchanges when they are selling their stake in a business. Demonstrating good ESG standards also helps investors when they are looking at other ways of selling their stake in a business – for example to ‘trade buyers’ and ‘secondary buyers’. The PRI commissioned PwC to do a Trade Buyer survey in 2013 and their main finding was that poor company performance on ESG factors can negatively impact the valuation of a deal.
It is therefore in the interest of private equity managers to encourage ESG data gathering by portfolio companies. This information should inform their ESG management processes during ownership of the company, and may help investors when they come to ‘exit’ the company.
What kind of resources can support investors struggling to navigate ESG-related issues in emerging markets?
It is not enough to just ask for sustainable reporting; private equity managers and their underlying portfolio companies must be enabled to deliver it. Knowledge of sustainability reporting practices and international norms varies widely, particularly in emerging markets. For this reason, the toolkit that CDC has recently published for private equity managers plays a very important role in building understanding and capacity around these issues.
The toolkit offers comprehensive guidance that allows private equity fund managers to set up an ESG management system to embed ESG considerations in all of their investment processes. Although initially designed to support CDC’s fund managers in emerging markets, the toolkit has a widely applicable use and is an invaluable resource for our private equity signatories.