ESG in our investment processes
Regulatory pressure and heightened scrutiny from clients are driving private equity managers to develop new tools to understand the climate risks across their portfolios – and to report these transparently. In fact, the UN Principles for Responsible Investment (UN PRI) now requires all signatories to show how they are aiming to meet the specific recommendations of the Task Force for Climate Related Financial Disclosures, meaning more than 3,000 investors representing more than half of the world’s institutional capital will now be required to shift towards more proactive reporting of long-term climate risks.
Investment due diligence
At Pantheon we pride ourselves on being an industry leader in sustainable investing. We’ve been providing ESG reporting to clients since 2012 – and since 2015 we’ve been undertaking our own ESG analysis of our fund managers. In 2018, we incorporated climate change risk questions to our investment due diligence for primary fund investments.
We now assess all of our managers based on an in-depth risk assessment that covers the following six key questions:
Do you have a formal approach to integrating ESG factors within your investment process?
Have you signed the UN PRI or adopted any other ESG-related standards?
Does your investment process include monitoring climate change-related regulation?
How do you engage with portfolio companies on ESG issues?
Do you include reporting on ESG risks that arise in portfolio companies to your advisory board, or to your investors?
Who within your organization is responsible for integrating ESG considerations in your investment decisions?
ESG manager ratings1
Fund managers ratings 2015-2020
Based on responses to these questions, we assign each manager a rating ranging from:
This rating alone will not determine our eventual investment decision, but it is a valuable guide – and provides a basis on which we can continue to engage with managers on improving ESG integration.
Fund managers ratings 2020-2021
From 2015 to the end of 2020, 66% of our managers were rated green (up from 61% compared to 2015-2016), with 11% rated red (down from 23%). Since the beginning of 2020, 61% of our managers were rated green, with just 3% rated red.
Scratching beneath the surface of these figures, some 80% of the managers we have invested alongside since the beginning of 2020 across both our private equity and infrastructure programs scored the highest rating (5 out of 5) for integrating ESG factors into investment processes. Notably, this includes 100% of the managers we back in our infrastructure programs.
Turning to those managers that engage directly with portfolio companies on ESG issues, 82% of those invested alongside since the beginning of 2020 scored the highest rating. Meanwhile, the percentage of managers achieving the highest rating for fully integrating assessment of climate change risk and opportunities into their investment processes in 2020 and 2021 is lower at 51%. This is an area where development is coming rapidly, however, and the percentage of those scoring the lowest rating was just 3%.
% of managers invested alongside in 2020 and up to 8 March 2021, that achieved the highest ratings for:
Integrating ESG factors into investment processes
Integrating ESG factors – infrastructure GPs only
Engage with portfolio companies on ESG issues
Fully integrated climate change risks into processes
In relation to the environmental impact of underlying portfolios, in 2016 we appointed RepRisk to provide ESG data on our existing portfolios – a move that featured in a case study on Pantheon in the UN PRI’s 2018 report ESG monitoring, reporting and dialogue in private equity. We now get live reports and news on ESG issues affecting more than 7,000 portfolio companies, with hundreds of “incidents” logged each year to enable us to examine cases of specific interest in more detail and intervene with the fund manager where necessary.
We built on this in 2018 by embedding RepRisk into our due diligence processes for our co-investment programs, and in a targeted way across our secondary investment programs. Since then, in February of this year we incorporated the Sustainability Accounting Standards Board (SASB) Materiality Map into our co-investment processes.
Incidents logged by RepRisk between Q1-Q3 2020
Incidents deemed relevant
Incidents where we have engaged with the GP
Location of incidents:
Asia and RoW
1 All 2021 figures are as of 8 March 2021.