Esohe Denise Odaro, head of ESG and sustainability at European private equity firm PAI Partners, describes her priorities for the year ahead.
What is your top sustainability priority for 2024? What will count as a success?
This year, we will continue to expand on the progress we made in 2023 – this includes laying a strong foundation for the nine new additions to our portfolio last year by rolling out our enhanced sustainability performance playbook. We will build on the implementation of new sustainability initiatives that go beyond the usual assessment of ESG risks, aligning business strategy, products and services with the evolving needs of consumers and future regulations.
In 2024, we also aim to enhance our plan of action for our three sustainability priorities: decarbonisation, diversity and inclusion, and biodiversity. Our goal is to align our strategies with the changing regulatory, market and macro developments and to build on the progress made last year at both the GP and portfolio levels. For example, expanding the implementation of cutting-edge investment cycle processes, such as our internal carbon price; operating portfolio-level initiatives like the industry’s first portfolio-wide women’s network, the PAI Portfolio Women’s Network; and collaborating with industry counterparts on thought leadership focused on important issues. This sort of collaboration seeks to create practical guides for implementing sustainability best practices in the industry. Last year, we published BLOOM, a practical guide for integrating biodiversity in private equity.
Where have you reached on your portfolio decarbonisation/climate journey? What is next on the to-do list?
We consider carbon efficiency to be one of our top sustainability priorities. We believe that companies that are carbon-efficient will generate the kind of value that our firm is looking for in its portfolio. In 2023, we created PAI’s Decarbonisation Taskforce, in support of this goal. In 2024, the Taskforce, drawing on our ESG team’s expertise and specialist tools, will keep track of and assess ways to manage our own carbon impact as well as the carbon footprint of our entire portfolio.
So far, we have supported eight portfolio companies with making science-based carbon reduction commitments, representing an estimated 42 percent of PAI’s portfolio Scope 1 and 2 emissions as of 2022. Next, we will closely support other portfolio companies with the calculation of their full value chain emissions, which enables identification of opportunities to reduce carbon and provides the basis to build robust decarbonisation roadmaps.
Going into 2024, we are placing a strong emphasis on transitioning to renewable and efficient energy stewardship, as highlighted by the inclusion of the fuel transition at COP28. For example, the team is partnering with portfolio company Armacell to implement a solar plant in the company’s Bahrain International Investment Park facility, which is expected to provide 60 percent of the facility’s energy demand and reduce carbon emissions by 1,130 tonnes per year. More broadly, we are working to identify and address energy efficiency opportunities across our portfolio. The pilot for this project focused on portfolio company Ecotone’s three most energy-intensive sites, which represent 70 percent of the group’s total energy consumption. The results suggest a promising potential reduction and are an example of the sort of portfolio transformation work that the PAI ESG team is working with external providers to institute.
ESG data: Do you think the industry has now reached a good place in terms of data frameworks?
The data journey is not over, but there is continuous improvement in the synergies amongst ESG data frameworks. For example, PAI joined the ESG Data Convergence Initiative in 2023, together with over 375 other organisations (GPs and LPs). Since its inception in 2021, the initiative has experienced significant growth. Accordingly, we have observed that investors are very interested in managing the amount of ESG reporting that general partners and portfolio companies have to submit. Many of them are trying to standardise this reporting by choosing to adhere to established frameworks like the Task Force on Climate-Related Financial Disclosures, the Principles for Responsible Investment and the diversity metrics of the Institutional Limited Partners Association.
Having said that, no framework will ever be perfect due to the nature of sustainability, its evolving roadmaps and broad scope. While consistent and dependable data is crucial, important decisions and concrete action cannot wait for the elusive “flawless” data, especially as the Paris Agreement’s 2030 deadline is drawing near.
ESG data: Are you now finding ESG data (both your own and industry benchmark data) to be genuinely decision-useful for investment decisions?
As part of our investment due diligence process, we take into account our internal carbon price, which was established in early 2023. Additionally, we use a specialist carbon footprinting tool to assess the potential future carbon liability of the companies we are considering. Investors are increasingly taking note of the EU’s Carbon Border Adjustment Mechanism and the UK’s counterpart, as these developments have become crucial factors to consider, especially for industries with high emissions. The carbon data helps us compare across peer group and portfolio for efficiency opportunities.
What is the next step in your ESG journey for human rights and supply chain risk?
For quite some time now, there has been a growing trend of expanding on the ‘S’ of ESG. Aside from diversity and inclusion, there has been a renewed focus on human rights. In 2023, the United Nations Working Group on Business and Human Rights acknowledged that financial actors possess a unique capacity to impact companies and enhance the implementation of the Guiding Principles. However, they also noted that there is room for improvement across the industry in this regard. Given the increased availability of information and data, as well as the shift towards mandatory due diligence requirements, human rights and supply chain risk are set to receive more attention and action from private markets in 2024.
We started looking deeply at supply chain issues a while back and to gain a deeper understanding of the issues at hand and the various roles that private equity investors can fulfil, PAI Partners organised two workshops in London and New York on sustainable supply chains in 2020. This year, as part of our annual action plan, we will be reviewing how PAI and its portfolio can effectively address and reduce human rights concerns within our ecosystem and supply chain.
What is the next step in your ESG journey when it comes to nature?
Given our sector focus, we understand the significance of nature and biodiversity and, for this reason, work with our portfolio companies to address the issue of food waste. We believe that by reducing food waste we can play a vital role in protecting biodiversity. For example, companies like The Compleat Food Group, Uvesco, Areas, Ecotone and Labeyrie Fine Foods generously donate excess food to charities as they look to minimise food waste. Additionally, Angulas Aguinaga, which sells salmon by-products to a high-quality pet food manufacturer, is exploring ways to repurpose food waste in other products, thus promoting a circular food economy.
In 2023, we became a member of the TNFD Forum, a network that supports the Taskforce on Nature-related Financial Disclosures. This partnership allows us to enhance reporting on nature, both for investors and portfolio companies. We also joined FAIRR, a sustainability network focused on food, with over 370 investors and $70 trillion AUM. Through this collaboration, we gain access to extensive food and consumer ESG research and insights, which help us shape the strategies of our portfolio companies.
In October 2023, we published BLOOM, a practical action guide that outlines five essential steps to help private market participants minimise their impact on biodiversity and protect associated returns. The guide promotes the incorporation of biodiversity risk and dependency considerations throughout a firm’s portfolio and beyond. We will use this, along with industry frameworks like the Taskforce on Nature-related Financial Disclosures and data sources such as FAIRR, to create a strong strategy for PAI’s biodiversity stewardship.
What is the first item on your DEI to-do list in 2024?
In September 2023, PAI furthered diversity and inclusion as a priority by launching a taskforce dedicated to reviewing and enhancing policies and ambitions in this area. This is an essential objective for the future.
The taskforce consists of eight colleagues who represent five teams across PAI, including PAI’s investment team, portfolio talent, HR, client and capital group and ESG. The Diversity & Inclusion Taskforce will work together with PAI’s Sustainability Committee and the ESG team to create practical solutions for the firm and across the portfolio.
We place great importance on fostering a strong pipeline of female talent and providing support for female leaders. With the goal of nurturing leadership and professional growth for women, PAI has established two networks: PAI Women, which operates at the firm level, and the PAI Portfolio Women’s Network, which brings together senior female leaders across the portfolio with the aim of promoting gender balance in senior leadership positions across our portfolio companies. Notably, the percentage of women in management roles in PAI portfolio companies in 2023 increased by 10 percent to 36 percent compared to the previous year. PAI’s D&I objectives for 2024 will prioritise the continued development of these initiatives.