Many firms take a portfolio-wide approach to ESG, applying initiatives and targets across existing investments, while others favour an approach of addressing sustainability for portfolio companies individually to better capture materiality. Permira, however, has set fund-specific ESG targets for its eighth flagship buyout fund, which closed last week on €16.7 billion.
Fund-specific ESG strategies are likely to become more common as firms introduce Article 8 or 9 strategies under the SFDR. Permira’s Fund 8 is Article 8-compliant, but the firm had other motivations besides regulatory compliance for this fund-specific ESG approach, head of ESG Adinah Shackleton told New Private Markets. This approach allows the firm to engage with companies on ESG during due diligence or upon acquisition and “set out what we want for the fund… [which] helps provide direction for the portfolio companies”, said Shackleton.
The fund-specific approach “means you can start having the conversation around targets early on in the investment period and align with the management team on what the targets are for the fund… and what the reporting requirements will be on an ongoing basis”.
“If you set targets across the whole portfolio, conversations with management teams would naturally start at a later stage in the investment lifecycle,” said Shackleton – although she add that the firm would “continue to engage with portfolio companies in earlier funds on ESG risks”.
“We’ve been integrating ESG for a number of years in our previous buyout funds, including looking at ESG risks and also engaging with companies post investment,” said Shackleton, but this is the first case in which Permira has set fund-level targets.
Within two years of Permira’s investment:
- All companies must have an ESG Policy, an ESG committee and KPIs
- Eighty percent of companies must have conducted carbon footprinting at Scopes 1, 2 and 3
- Eighty percent of companies must have an energy efficiency plan approved by their boards
And within three years of Permira’s investment:
- All companies must have at least one woman on the board.
- Fifty percent of companies must have at least two women or 30 percent women on their boards
Why choose these?
The targets relate to “areas [that] are applicable across companies regardless of the sector”, said Shackleton. “The targets that we’ve selected can be applied across any company in any geography.”
The targets around creating an ESG policy and ESG committee and setting company-specific KPIs allows companies to work out what ESG factors are material to them, and to work towards these, Shackleton added.
But carbon footprinting, decarbonisation and energy efficiency plans and board diversity are relevant factors to all portfolio companies, said Shackleton. This includes technology and service sector companies, which are often considered to have relatively low carbon footprints: “Generally, these companies have a smaller scope 1 and 2 footprint than companies in some of the other sectors we focus on, such as consumer and healthcare,” said Shackleton. “However, these businesses can have large scope 3 footprints, for example from the use of energy in third-party data centres.”
Permira’s targets also reflect investors’ priorities and the areas most important to the firm. “We see LPs asking questions about climate change and climate risk. We get a lot of requests for carbon footprinting data, so it really made sense to put carbon footprinting in as a building block. And we also have quite a few investors asking us about things like energy efficiency plans and climate targets, as well as board gender diversity.”
Investors in the fund include the California Public Employees’ Retirement System, which committed €650 million; California State Teachers’ Retirement System, which committed $350 million; Cathay Life Insurance; ICG Enterprise Trust; Minnesota State Board of Investment; New York City Employees’ Retirement System; New York City Police Pension Fund; Northern LGPS; Oregon State Treasury; and the State of Michigan Retirement Systems.
How it works
Companies’ own management teams are responsible for meeting the targets. “[Permira’s] role is to actively engage with the management teams,” said Shackleton. The firm shares resources and advisor contacts that it has itself worked with to support companies in meeting their targets. “We also do things like knowledge-sharing sessions with the companies so they can learn from others in the portfolio.”
“Companies are at different stages” on progress against these targets, “with some much further along than others”, said Shackleton. “The conversations with portfolio companies aren’t difficult, it’s just that for some of the companies they might need to take more steps to actually align around the targets than others.”
“Our intention is that companies will meet these targets… Obviously, there might be specific situations in companies where it’s just not feasible, but in those situations again, we will continue to engage with the company during the investment period.”