Members of Ares Management‘s ESG team lay out their priorities for the year ahead, as part of New Private Markets‘ Agenda 2024 series:
What is your top sustainability priority for 2024? What will count as a success?
Adam Heltzer, partner and head of ESG: 2024 feels like a “back to basics” year for sustainability in private markets: placing portfolio companies at the centre of the work (more so than top-down thematic mandates), re-affirming which aspects of the ESG agenda are most material for a given investment, and then supporting management teams and boards of directors to carefully identify, resource and execute on a value-accretive ESG agenda.
This may seem obvious, but the heightened focus on industry frameworks and collaborations over the last few years – while vital to field-building – has drawn ESG practitioners to higher altitudes of analysis, and arguably further from on-the-ground engagement work. It will be a year to balance these two levels and support portfolio company executives to navigate an increasingly complex sustainability landscape. While 2023 saw PE firms aiming to advance on all ESG topics at full throttle – to demonstrate more ambition and aspiration than peers – we believe 2024 will focus on prioritisation, materiality, and capturing the measurements needed to demonstrate financial, operational and sustainability impact.
We believe that success in this context will look like “pull” from portfolio companies. Despite a more nuanced ESG landscape in the US, other forces continue to drive action for portfolio company management teams. Whether from customer demands (and by extension, competitive pressure), regulation, or an increasingly aligned set of investors across the capital stack, we believe that effective CEOs have few doubts about the direction of travel, and will wish to shape their ESG programmes to achieve their growth ambitions.
Do you think the industry has now reached a good place in terms of ESG data frameworks?
Brittany Agostino, principal on the ESG team: Yes and no. There is no doubt that capturing even a small set of consistent ESG data points across around 4,300 PE portfolio companies through the ESG Data Convergence Initiative (EDCI) is a great accomplishment. The benchmark reports enable a more sophisticated conversation with portfolio companies, and the initial findings linking ESG performance to financial and operational performance (for example, lower injury rates correlating with higher revenue growth) can be powerful in an era of ESG scepticism.
Managing the proliferation of frameworks – for example, by ensuring the ESG Integrated Disclosure Project for private credit investors is inter-operable with the EDCI – is also good news for the market, not to mention the average PE-backed portfolio company CFO who is trying to double profitability in a few years while juggling an ever-shapeshifting array of sustainability disclosure demands. That said, we believe some key challenges remain:
- Maintaining a convergence posture amid an oncoming wave of ESG regulations (like the Corporate Sustainability Reporting Directive, or the Sustainable Finance Disclosures Regulation’s Principal Adverse Impacts)
- Keeping portfolio company executives focused on the most material ESG factors and metrics for a given portfolio company (rather than the “lowest common denominator” metrics prioritised by frameworks)
- Evolving the industry’s focus from alignment on disclosure to alignment on engagement and desired impact. This will be a key focus of the UN Principles for Responsible Investment’s Private Debt Advisory Committee (PDAC) in 2024
Are you now finding ESG data (both your own and industry benchmark data) to be genuinely decision-useful for investment decisions?
Agostino: In the sense that investment decision-making takes place throughout the investment life cycle, we believe certain ESG data continues to be a vital input into our value creation and protection efforts. For example, cybersecurity breaches discovered in diligence can have a meaningful impact on a company’s risk profile; conducting a first-ever carbon footprint and translating that into a Science Based Target can help maintain/grow market share; and some governance improvements are required to meet IPO standards.
The benchmarks, while far more useful than public comps, still need more time in the oven. They’re useful as conversation-starters, but sometimes raise more questions than they resolve. Over time, the higher “n” and more refined sector definitions should sharpen insights and enable more catalytic impact. In the meantime, they should still form a vital part of the annual data readout, even as a source of feedback for how to make the dashboards and insights ever more impactful.
Where have you reached on your portfolio decarbonisation/climate journey? What is next on the ‘to do’ list?
Joe Indvik, climate strategy lead: While the currents of climate action in private markets have changed meaningfully over the last few years, we have aimed for a pragmatic step-by-step approach throughout, outlined here. Key recent milestones include: (a) disclosing our inaugural carbon footprint for financed emissions in 2023 (2022 footprint) covering 35 percent of invested capital; (b) expanding our internal “Climate Action Group” to more than 40 members; (c) conducting climate engagements with select portfolio companies; (d) hiring a dedicated Climate Lead for Ares’ climate approach; and (e) continuing to invest in climate solutions through our various strategies.
In 2024 and beyond, we aim to expand and improve our carbon accounting programme in partnership with a software vendor – enabling us to better target and track how we engage our portfolio on climate – and deploying engagement programmes across asset classes to respond to rapidly growing investor “push” and market “pull” for decarbonisation.
In addition, we continue to be an active participant and an industry leader in initiatives that are helping establish standards for what decarbonisation and net zero mean for alternative investment managers through engagement with organisations such as the UN PRI’s PDAC, Initiative Climate International (iCI) and Partnership for Carbon Accounting Financials (PCAF).
What is the first item on your DE&I ‘to do’ list in 2024?
Indhira Arrington, partner and chief DEI officer: In 2024, the DE&I team is focused on piloting a DE&I learning curriculum varying by seniority, in partnership with a digital learning platform, to augment our existing inclusion training and drive DE&I fluency across the firm.
We believe it is critical to lean into our partnerships with portfolio companies to advance DE&I and will continue to scale that work through what we refer to as “AmpliFY DE&I,” where we work with portfolio companies to develop and support data-driven, accountability-based DE&I strategies. We also plan to scale our DE&I data collection efforts across asset classes enabling us to better engage with the portfolio on these topics.
Lastly, as a founding partner of AltFinance, we believe we are well positioned to continue to attract, develop and provide professional opportunities to HBCU students to increase diversity in the alternatives industry.