The importance of pragmatism, first-hand experience and understanding of local community are among the lessons that ESG professionals have learnt in the field.

Cyrille Arnould spent over 20 years working on blended finance projects for institutions including the European Investment Bank and the International Finance Corporation. Last year, he founded Annycent Capital, a renewable energy manager specialising in emerging markets.

He recounts how, when working on a project in a developing country, attempts to improve worker’s prospects though a wage increase went awry. “Average pay for local workers on a project was about $100 per month. After pressure from NGOs, the project manager raised construction wages to $180. The end result? Among others, the local education system was impacted because teachers earning less than $80 put on a helmet and waved down trucks that would come by [to get work on the project].”

The lesson, he says, is that even the most well-intentioned initiatives will fail if managers don’t understand the wider context in which they are operating: “How do you ensure you get positive trickle down from the project into the community without creating unforeseen issues?

“Another example, you need to feed your crew and you want to source food locally. But are you going to create inflation? Are you going to price out local people from the produce markets? Today, we’re smarter than we were, but the issue hasn’t gone away… If you ignore the social context, you’re most likely going to fail, and you could make a situation worse.”

Boots on the ground

John-Paul Wale, head of ESG at Annycent, learnt the hard way that it is important to ensure that procedures that have been agreed in principle are put into practice.

“I have only shut down a site once due to safety conditions – a site I’d been led to believe had good ESG standards,” he says, in reference to a project in a previous role. “20 minutes into a walkdown, I’d seen multiple high-potential unsafe acts including workers walking on pipelines over 10 metres up, away from scaffold with no fall protection, and an improvised rope hoist lifting sheets of aluminium cladding which could have taken someone’s head off.”

After a meeting with the project’s engineering, procurement and construction contractor, during which its CEO “gave an impassioned speech promising a significant site safety campaign and step change in performance”, Wale “walked away thinking ‘we’ve really done something here [in terms of making improvements]’”.

However, on his next visit, it became apparent his recommendations had not been taken on board. He explains: “there was probably a marginal improvement: workers at height were mostly wearing, if not all using, harnesses, but conditions were still poor. This was because the site’s safety approach focussed on compliance rather than culture. The lessons learned are: one: safety culture must be owned and driven by the entire site line-management structure, supported by the safety officers – not the other way around, and two: You have to see the conditions for yourself – site visits remain essential to understand and manage your ESG risks.”

Visiting sites in person has other benefits, according to Adam Black, head of ESG and sustainability at Coller Capital, a secondaries-focussed firm with $27.5 billion AUM per NPM data. Previously at mid-market firm Doughty Hanson, Black explains how he took a novel approach to making the investment team understand the importance of ESG procedures: “I used to get a member of the deal team to join me on some of our site visits. I would get them onto the factory floor to participate in one of the more hazardous tasks, such as painting the inside of a tank – with a full-face respirator and Tyvek suit on – so that the experience stayed with them… that would always be quite a powerful thing to do, because they would always then be mindful of the reality of the job.”

This type of hands-on experience would then “help the conversation along” when Black would subsequently make the case, for example, to “spend quite a bit more money on a new type of low toxicity coating”.

Pick your battles

The necessity of pragmatism was a common theme during conversations. Lauren Densham, head of impact and ESG at Chicago climate tech firm Energize Ventures and a former director at KPMG, notes the importance of taking a portfolio company as you find it: “The biggest thing that hasn’t worked is not customising your approach to the specific circumstances of a company… you have to meet people where they’re at and that might depend on the sector that they operate in or the maturity of their company… If you go to a company that still has a long way to go and then try to say ‘here’s 100 things you need to do to be a rock star on ESG in the next 12 months’, that is not going to work.

“Not every company needs to be thinking about every single ESG issue. It’s the ones that are the most material to that company and identifying the two or three that you want the company to focus on moving the needle on this year,” she adds.

Black agrees that trying to address every issue immediately is unlikely to be workable and emphasises the importance of establishing clear priorities when engaging with a company: “You have to know where your red lines are, because there are some things you are not going to compromise on, but there are other things you know you’re being a bit cheeky [asking for].

“We would never drop an issue, but we would be pragmatic and say ‘okay, we don’t need a Rolls Royce solution, the Ford solution will do, and we’ll give you another few years.’”

The bigger picture

It is equally important not to lose sight of the reasons for engaging with ESG in the first place. Making a business case for actions is key, according to Irene Rodríguez Sánchez, ESG vice president at AltamarCAM Partners, a Spanish manager with €17.9 billion AUM according to its website. She also spent several years as a sustainability consultant at PwC.

“At the end of the day, our core objective is to bring value to our clients. The transition towards a sustainable economy requires an enormous amount of resources, and it is essential to transform this challenge into an attractive investment opportunity,” she explains.

In the same vein, some GPs are guilty of being more concerned with style than substance, says Sanchez: “Reporting is not just a formality, but a catalyst for change. However, it can backfire if we focus more on crafting persuasive narratives than on developing sound strategies and setting clear goals based on KPIs.”

Ultimately, GPs must accept that there will be bumps in the road. Densham calls for emerging managers looking to develop ESG procedures to “experiment and see what works and see what doesn’t. Come up with something and then try it and iterate it. I feel like people get stuck trying to make something perfect and nothing is going to be perfect in this space”.