How to persuade GPs and portcos to address ESG

LPs and ESG professionals can struggle to get GPs and portfolio companies’ management teams to focus on ESG. Sustainability professionals say they have different methods of cutting through “language problems” and label overload that get in the way of engagement.

Step one is to “build deeper relationships with management,” said a fund manager’s ESG head, speaking at 100 Women In Finance’s Impact Investing Symposium in New York on Tuesday. “It’s squishy and not a balance sheet number, but it’s really important to understand what this management team is like, how they execute on strategy and how they work together.” The event was held under the Chatham House Rule, meaning speakers could not be identified.

Peer pressure

Another sustainability professional said they create interest and buy-in from a portfolio company’s management team by benchmarking it on ESG issues against “the peer set that they themselves have identified”.

Management teams also respond well to focused initiatives aligned to their commercial objectives. “You [should] never bring a CEO a problem without solutions. And you don’t bring them a laundry list of things to worry about,” said an ESG head at a private fund manager.

“We’re looking at what management says is on their mind,” the ESG head continued. “You can find that in a lot of places – not just their sustainability report. And we try to identify three to five issues that we think can impact their cost of capital and the valuation of the company. For example, I have not read a 10k [a company’s annual report in the US] where talent is not listed as an existential risk. Climate change, supply chain integrity – these are things that are front and centre for management teams.”

The investment adviser’s sustainability head said: “I try to keep things simple, by design, for us. I try not to play games with the different labels. It’s a dialogue. It’s trying to reach a specific number of outcomes.”