ESG in Private Equity: Investments that go beyond the financial impact
Updated: Jun 25, 2018
Tanya van Lill, CEO of SAVCA, recently addressed LEX Africa’s seminar on PE firms managing environmental, social and governance (ESG) investment considerations.
“South African fund managers, traditionally, are more comfortable and au fait with incorporating ‘impact investing’ and environmental, social and governance (ESG) measures into their deals because of the fact that Financial Development Institutions (DFIs) have been involved in South Africa for so many years.”
Tanya van Lill is the CEO of the South African Venture Capital and Private Equity Association (SAVCA). Speaking at a LEX Africa seminar titled, An Outlook on Africa 2018, she said ESGs have always been a requirement for private equity companies, but, these days, firms are so comfortable with it, the mentality around ESGs has changed to a business imperative rather than a ‘nice to have’.
“We see a lot of our fund managers measuring the impact of their investments beyond just the financial impact that it has.”
Ms. Van Lill said the perception that some capital-seekers might have of private equity investors is that they come in to raid a business, leverage it and strip it. Private equity in South Africa, she said, is completely different.
Ms. Van Lill said when she joined the industry a year ago, she also had perceptions of a cut throat industry. “But, I must say, I was quite pleasantly surprised to see the level of camaraderie and cohesiveness that we have in South Africa for private equity, for deals, for making a difference [and] for having a positive impact.”
She said while this ‘preservation’ mentality exists in other parts of the world, it is predominantly found in developing economies where there is a need for specific aspects beyond financial returns. For developed economies, she said, ESGs may not always be front and center of the agenda.
“At international conferences where they talk about impact investing, especially in the US and Europe, it wasn’t a foreign concept [to] them, but, it wasn’t something they always had in the back of their minds… where we (African economies) have always had it in the back of our minds.”
Ms. Van Lill said one of her organisation’s strategic objectives for 2018 is to promote the asset class. Investopedia defines an asset class as “…a group of securities that exhibits similar characteristics, behaves similarly in the marketplace and is subject to the same laws and regulations. The three main asset classes are equities, or stocks; fixed income, or bonds; and cash equivalents, or money market instruments.”
Said Van Lill: “[We’re] making sure capital-seekers understand private equity and see it as a potential investment route, and also [to help] institutional investors understand that [they] can allocate some of [their] assets into private equity. What we’ve done is through our research, our conferences, our training, through our networks, our relationship building [exercises and] attending international conferences, [is to raise] the profile of the asset class, as well as of the region in terms of as an investment destination.
“Some of the things we are going to potentially embark on this year is immersions for international LPs (limited partners) to come to South Africa and experience life on the ground. [We would like to do this] to demystify some of those perceptions about the risk and potential risk of the country itself. [We will] engage with our GPs (general partners) [and] engage with portfolio companies that have received investment, so they can see the impact it’s made. We’re also going to focus more on educating capital-seekers, especially family business in terms of looking at private equity as an option, in terms of equity stakes going forward and then we will continue with our research, using our media bases and using every opportunity to educate investors, such as pension funds, about the asset class and its benefits to economic growth.”
According to MSCI, in 2018, investors are looking for ways to position their portfolios to best navigate any uncertainty brought about by policy, technological or climatic changes.
In a January report titled 2018 ESG Trends to Watch, MSCI notes five the major trends that will shape how investors approach risks and opportunities will include: Sifting for management quality in emerging markets by using ESG signals to help navigate the evolving size and shape of the Emerging Markets investment universe. The organisation believes more than 15 percent of Emerging Markets domiciled constituents of the MSCI ACWI Index have ESG Ratings that eclipse their country’s ESG Sovereign Ratings, making them country outperformers worth watching.
MSCI also believes scenario testing climate change will cause investors to expand their view of portfolio climate risk from company carbon footprint to macro exposures across asset classes. “We found that at least 40 percent of each major asset class is exposed to countries at high risk to irreparable physical damage under a high warming scenario.”
In addition to the two aforementioned trends, MSCI says investors will: “…be catalysed to adopt ESG factors in fixed income investments, as demand from leading asset owners to align their ESG frameworks across asset classes coincides with interest in how ESG factors can add value to credit analysis; look to alternative data sources to balance the growing volume of corporate sustainability disclosure.
To this end, MSCI notes: “In our own ESG Ratings, 65 percent of a company’s rating on average is driven by data sources beyond voluntary disclosure.
Finally, MSCI states it believes investors will increasingly seek opportunities to invest in talent quality, as Artificial Intelligence (AI) redefines work tasks to require higher skilled human input. “While good workforce data is hard to come by, we find evidence that companies with stronger human capital practices had better productivity growth than industry peers.”