Q&A: Accelerating the ESG shift

After a year of upheaval around the world in the wake of the Covid-19 pandemic, you might think that longer-term considerations related to environmental, social and governance (ESG) risks would have taken a back seat. But according to Jie Gong and Alex Scott, Pantheon Partners and Co-Heads of our ESG Committee, nothing could be further from the truth.

Has Covid shifted the focus away from ESG in terms of risk management?

Jie Gong: Quite the opposite! Covid is an exogenous shock to the system that has put risk at the top of fund managers’ minds. They are now actively looking for weak links right across their portfolios, whether operational, financial or human in nature. In short, they are much more engaged than they already were in the fundamental risks within every portfolio company. Having an ESG framework is more important than ever, as it is a very wholesome toolkit for assessing these risk characteristics.

Alex Scott: The pandemic has accelerated a lot of existing trends. That’s true both in terms of general investment themes, such as the longer-term shift towards businesses that support digitization, and by the way it has focused attention on the sustainability of some business models in general. As private equity investors we are looking for robust and resilient businesses that will stand the test of time and maintain broad stakeholder support. That’s ultimately what ESG is all about.

JG: Covid has also pushed ESG up the agenda in a more direct sense. There are parts of the world where climate change has already heaped misery on people in vulnerable situations, for example as a result of extreme weather events, and that have now also been hit hard by the pandemic and the fallout from measures to contain the virus. There is more of a recognition that as a society we can’t ignore these issues any longer.

As private equity investors we are looking for robust and resilient businesses that will stand the test of time and maintain broad stakeholder support. That’s ultimately what ESG is all about.

Alex Scott

Has there been any direct private equity response to the crisis?

AS: Private equity firms treated the pandemic as an opportunity to be more proactive in the way they engage with their communities. This came in the form both of direct donations from private equity managers, as well as in the form of services provided by portfolio companies in areas such as healthcare. Of course, some people will be cynical on the motives, but you cannot ignore that hundreds of millions of pounds of donations and support have come from right across the sector.

Positive impacts

Find out more about the support that has been provided by some of our underlying portfolio companies in the wake of the pandemic.

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How has the crisis affected the way managers interact with clients?

JG: Since the start of the crisis, there has been an unprecedented level of communication between fund managers and investors on impacts and risk factors observed across portfolios. This has set the bar very high for reporting and it has set expectations for investors on the information that can be made available.

AS: Again, this is really just accelerating an existing trend. We have been getting an increasing number of questions from investors on ESG risks over the past couple of years – and as their own ESG processes have become more sophisticated, so the level of detail they are asking for from us has grown. For some this is even a basic screening question now; you need to pass certain criteria to be considered for an investment.

Away from Covid, how is the industry progressing on ESG adoption?

JG: Last year was is a momentous one for our industry – really, the start of a new era. From now the UN Principle for Responsible Investment (UN PRI), to which we signed up in 2007, will require all signatories to show they are taking measures to move their reporting in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). That means these higher standards will soon apply to in excess of 3,00 investors representing more than half of the world’s institutional capital.

AS: We’re already underway with a project to implement enhanced reporting across our infrastructure portfolio, which is the part of our business most exposed to climate change risk. In mid-March we started working with ERM, a sustainability consultancy, on a program that will initially provide a heat map of risk factors across sectors and geographies. That will enable us to do interesting things in relation to visualizing risk in client reports to help them understand their climate change risk exposures.

JG: ESG has long been a priority for the business and our ESG committee, which is responsible for coordinating our efforts in this area, reports directly to the Partnership Board. I’ve always been proud that Pantheon is at the forefront of the industry in this area, going back to being among the first signatories of the UN PRI back in 2007, establishing our ESG working group in 2008 and integrating responsible investment principles systematically into our investment process in 2010. The TCFD reporting project is just the latest example of us leading the way.

I’ve always been proud that Pantheon is at the forefront of the industry in this area.

Jie Gong

What other ESG risks do investors need to consider beyond climate change?

JG: There are other existential issues besides climate change that pose a serious threat. Things like water scarcity and deforestation. These are broader issues that will have knock-on effects to the eco-system of human beings and businesses, so they have to be on investors’ radar.

AS: More broadly, if you think about things that have the potential to undermine the foundations of the economy, then D&I has to be near the top of the list. There is a lot of evidence speaking to the benefits in terms of profits and returns for those companies that better reflect the diversity of their communities. We’ve also seen during last year with the tragic events in the U.S. and the global Black Lives Matter protests that followed that there are serious consequences for ignoring these issues.

I would also highlight cybercrime – especially in the more digital world we’ve had to inhabit this year with the shift to remote working in the wake of the Covid pandemic. This is now one of the major existential threats that keeps business leaders up at night.

Cybersecurity

Find out what we’re doing to keep our business cybersecure in a digital world.