LPs step it up on ESG DD

Three years is a long time in ESG due diligence, according to reports coming back from the fundraising trail. In 2017, “the recurring questions were ‘Do you have an exclusion policy?’ and ‘did you sign the UN PRI?'” said Jaime Prieto, founding partner of Kartesia, which just raised its largest ever fund: a €1 billion senior debt vehicle. For the latest fundraise, investors submitted ESG-specific questionnaires with “more detailed questions”, such as whether the firm monitors its portfolio’s carbon footprint, how the firm integrates ESG into its investment process and identifies ESG risks, and whether it communicates with LPs on ESG.

The Europe-focused SME lender responded to investor demand with a more ESG-rich fundraising presentation, including slides on ESG tools, case studies, ESG integration at each stage of the investment process and the firm’s own equality and diversity credentials. The fund has also included some ESG key performance indicators in its quarterly reports, including whether Kartesia sits on portfolio company boards and whether portfolio companies have positive impacts on society or the environment.

“The growing appetite for private debt funds that meet ESG criteria is clearly noticeable,” Prieto told NPM.

Further reading: How private debt managers are taking ESG to heart.

Becoming impact

EV Private Equity – formerly known as Energy Ventures – has been investing in tech businesses in and around the energy sector for nearly two decades. The firm (“lovely people”, as one private markets influencer tells NPM) is currently in the market with Fund VI looking for up to $350 million, according to a source with knowledge of the firm. This vintage is a little different from previous ones; a portion of the carry that the GP can earn is contingent on the portfolio meeting a very specific impact metric relating to decarbonisation.

The fund has a target “impact pledge” of a net reduction of 1 million tonnes of CO2 equivalent over a 10-year period, as calculated using its own impact quantification method, dubbed “EV IQ”. According to a document seen by NPM, the EV IQ method weighs up the total carbon footprint of each portfolio company (scopes one to three) then nets that off against emissions reductions it manages to effect among its clients and their value chains. If the latter outweighs the former, the net impact is its contribution to reducing global emissions.

If the fund fails to hit its total emissions reduction pledge, then the GP will forfeit 25 percent of its carried interest. Forfeited carry is diverted to purchase carbon credits.

Financial penalties attached to impact or ESG underperformance are a rarity. There are debt facilities with interest payments that flex according to pre-agreed ESG indicators, but these seem less punitive – certainly for the GP – than being potentially hit in the carry. There is also the case of an Australian GP, Gunn Agri Partners, linking its fees to its sustainability performance.

On the subject of impact…

Read what those at the cutting edge of it think about who should get to wear the impact label here.

NEXT up

TPG is understood to be in talks with limited partners about bringing in additional capital for its platform that backs diverse-owned managers, reports Private Equity International’s Carmela Mendoza. She spoke to Anilu Vazquez-Ubarri, chief human resources officer and a partner at TPG, about the firm’s TPG NEXT platform, which was formally launched in late March. The firm has made three investments so far from TPG’s balance sheet. It’s not clear either from the launch statement or Vazquez-Ubarri’s comments whether the initiative is entirely mission-led – to promote diversity and inclusion at TPG and the wider industry – or whether, like more conventional seeding platforms, it will be return-seeking.

In the words of the firm: “TPG NEXT will seek to reshape and expand the alternatives marketplace, introducing new and flexible avenues to strategic capital to develop, launch and propel the next generation of diverse investors and entrepreneurs. Empowering a more diverse group to become capital allocators will help to increase investment into diverse-led businesses, creating a positive ripple effect across the industry.”

Read the full interview here.