WEBINAR TRANSCRIPT

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Nick Donato: Hi, welcome to the webinar. I’m Nick Donato, an industry specialist here at Navatar. Today we’re going to be discussing something that is, really on a personal level, a highly interesting topic. We’re going to be talking about how private fund managers can find what we’re calling here their ESG mindset.

Now what do I mean by that? Well, what’s happening at the moment in the industry is that more and more fund managers, including private equity and hedge fund managers, are getting on board with responsible investment, but they’re not always sure how to put those words into action. So I’ve recruited here some of the industry’s top ESG specialists to help us find out.

But first, before we get into that, let me get through some quick housekeeping. If you have any questions at any time during the presentation, by all means, send them our way. You can use that GoToWebinar tool on your screen there to submit them. And what I’ve done is reserved some time at the end of our webinar here for our speakers to field them. I will introduce you to them shortly.

Secondly, because this always comes up, yes, a recording of the presentation will be sent to all of you. What we’ll also do is include the slides, so look for that in your inboxes in the next few days to come.

Thirdly, you may be wondering how Navatar fits into the picture. The simple answer is that we are a cloud provider for the private equity and alternative assets universe. What we do is provide fund managers a platform, in fact, we call it the industry’s first connected growth platform because what it does is provide software that brings together a bunch of your workflows onto one system, and that includes relationship management, fundraising, reporting and managing your deal flow. In this context, we are, of course, talking about ESG and what you’ll hear is that responsible investment should be a part of your overall due diligence and investment process. Navatar is the system we hope you use to manage that process. We have built-in workflows that can be customized, that you can incorporate ESG action steps onto the system. And it all sounds a little bit complicated but it’s really simple. And trust me when I say that it frees up time and just makes you more efficient at your job. We have a customer success team, who unlike other cloud providers, are specialists in your field.

Also, allow me to thank Invest Europe for helping us put this webinar together. Invest Europe is the industry body formerly known as the EVCA and how do I put this… If you don’t know who Invest Europe is, you are not in the know when it comes to European private equity. But more importantly, they promote a lot of industry issues and they crunch a lot of data in a way that speaks to the private funds universe at large, both in and out of Europe. And with ESG and the work that they’re doing around that, it’s really a prime example of the type of impact that they’re having.

Now, before introducing our speakers, I want to set the stage here because, as I said, ESG is now just this huge trend in our industry and, truth to be told, the trend hasn’t really hit the mid-market in full force just yet. I think that will happen eventually though for a number of different reasons. So what I would do is recommend that managers get ahead of this curve if they want to separate themselves from the competition. Because look here, I want to put some hard numbers on what I’m talking about. Coller Capital, a secondaries investor, what they did is they polled a bunch of LPs and found that pretty much one in four are now willing to turn a fund manager down if they aren’t green enough, let’s call it, and this is pretty surprising stuff. It used to be the case that a LP in Europe, where this whole ESG trend really started, would turn down a manager for ESG reasons. Clearly, that trend has spread across the globe and now even in North America, about one in five LPs are willing to turn you away for not giving enough consideration to ESG. And so get this, I did some digging and found that the last time that Coller even polled LPs on ESG in one of its half annual barometers was two years ago. And in that survey, LPs named it as the least important skill a manager can have to drive returns, which tells me that clearly investor sentiment on this issue has evolved.

Another thing, so take a look at this. Managers are clearly responding to investor wants and demands. Almost three out of four managers have now made a public commitment to ESG. In 2013, that figure was something like 57% and at the same time we have seen a marked uptick in the number of shops with responsible investor policies. This is up from 55% to 68%. And if they haven’t done it already, it seems that virtually every manager has or at least will shortly have a responsible investment policy. Now all of this that I’m speaking about comes with a bit of a caveat. These numbers come from a recent PWC survey. And I had a look at their sample size or the demographics of the sample and it isn’t wholly representative of the mid-market. Because remember when I said that the ESG trend has not taken hold at the top of the market the same way as it has in the mid-market where the resources and the ability to hire specialists are more plentiful and easy to find. But the message here is that this trend will move down, and not just because investors demand it. The real upshot is that managers are beginning to appreciate that ESG, it’s simply good business practice. Look, if you’re keeping your workers happy and you’re cutting carbon emissions, you’re not just putting a smile on investors’ faces, you’re saving money and you’re creating goodwill.

In fact, in that PWC survey, when asked what’s driving responsible investment, nearly half or 44% to be exact, of managers put risk management up as their top answer. So here’s the challenge: How do mid-market managers get ahead of this inevitable trend? Where do they start? And what does it mean to invest with an ESG mindset? Well, here’s the good news. In November, on the back of all of these trends that I’m talking about here, Invest Europe published a ESG questionnaire that managers can use to assess ESG factors at the companies that they own or that they plan to invest in. And this DDQ is a great starting point and it’s a great framework for assessing how much ESG work a portfolio company may need. And where the best levers for ESG value creation are at that target portfolio company.

And also, because the DDQ isn’t meant to be this exhaustive list of questions to answer every ESG question, it also helps to identify the areas where you may need more of a technical assistance. And actually, speaking of technical assistance, that is a pretty good segue for me to introduce our speakers here. We not only wanted to discuss the DDQ in more detail but we want to talk about these wider ESG trends as well. All three speakers, in fact, were part of an Invest Europe committee that played a really key part in developing that questionnaire. So, they are some of the best minds on ESG in the private equity sphere. So, leading into that, Blaise, can you please introduce yourself? And then we will hear from James and Marta.

Blaise Duault: Okay. Hello. I’m Blaise Duault. I’ve been working for PAI Partners, a French private equity firm for 15 years. Being part of the finance team at the beginning of my career, and then since six years now more focused on public affairs and ESG issues. I was instrumental at my level to launch a formal ESG strategy back five years ago which started for PAI Partners as assigning the principles for responsible investment costed by UN. Since then, I have deployed to raise awareness at the French association, private equity association, AFIC. And I’ve joined since then the equivalent at the level of Invest Europe, a broader association. Prior to PAI Partners, I started my career in audit at KPMG. And I’m happy to take part in this discussion and hope we’ll be very helpful for those who attend it.

James Holley: Right. Thanks Blaise. Good morning everyone. My name is James Holley. I’m head of Responsible Investment at KPMG and that forms part of a broader sustainability practice. I’ve got 13 years or around 13 years of experience now as an ESG practitioner, predominantly supporting private equity clients integrate ESG into their investment processes. And I think we’re certainly seeing much more appetite and interest around ESG from not only a due diligence perspective, but also, helping our clients identify and implement ESG strategies. For example, and I guess just picking up on one of Nick’s points in the intro there, is that we are seeing real life cases where investors are refusing to invest in certain GPs, private equity firms based on the lack of ESG or robust ESG processes and systems that they have. Recently started working with one client that experienced that exact issue during the fundraising process where an LP refused to invest. So these issues are real and we’re here to hopefully help raise that awareness for you and yeah, look forward to being part of this webinar. I’ll hand over to Marta now.

Marta Jankovic: Thank you, James. Hello everyone. My name is Marta Jankovic. I am working at APG Asset Management, which is an asset manager of Dutch pension plan assets. We’re based in the Netherlands. But we also have an office in New York and Hong Kong. And we currently manage approximately €436 billion on behalf of pensioners here in the Netherlands. So we’re quite a large asset manager and we have had a responsible investment policy in place since 2007. And we have been one of the pioneers in the ESG integration both in capital markets as well as in alternatives. My role is to oversee the integration of ESG for our clients in alternative asset classes which includes private equity. I have a legal background. I used to be an in-house counsel but then I saw the light when I moved away from private practice and my role as an in-house counsel into full ESG, which I think is a necessary thing for many of us to do if we want to really fully embrace this emerging area that’s now going mainstream.

I am also chairing the current Responsible Investment Roundtable of which both James and Blaise are members at Invest Europe. And I’m also a member of the board of Invest Europe and I’m really, really keen on making sure that the market understands what LPs need, and that I’m really glad to hear that this is not just an area where LPs are driving and the GPs have to follow, but that it’s something the GPs are embracing as a good practice, as good risk management, as good value creation. And I look forward to the rest of this webinar.

Nick Donato: Yes, and I think that’s one of the key points that we’re going to hear today, Marta. That it’s not just about satisfying LP wants. That this is a way to create value and that this is a way to manage your risk. So, that being said, let’s move on to the agenda. Here we go. Here’s the game plan, folks. I’m going to ask James to provide a brief presentation on how you can use the DDQ in practice. The DDQ really is an intuitive document, but it is valuable to hear from someone who played a hand in its creation on how can it be best used in the field. And in fact, seeing one of the audience questions already, who’s asking where you can find this DDQ, I guess the easiest way would be you can go to Invest Europe’s website, it can be found there. But also, every attendee here will be emailed in a day or two, that will include a link to both a recording of today’s webinar, as well as the link to that DDQ. So after that, James’ presentation, following that, we’re going to build off of that by having a short panel discussion on the DDQ, as well as these wider ESG trends, because it’s important to put this thing into perspective.

So, I’m going to rely on Blaise to provide the GP point of view, I want Marta to provide the LP point of view, James will be on hand to answer technical questions. And all this is really to find out how managers can find their ESG mindsets, because that also means doing things like sharing your ESG work with investors. Or for instance, including an ESG section into your quarterly report, so we’ll hear about that. So without further ado, James, please tell us more about this DDQ.

James Holley: Thanks, Nick. If you wouldn’t mind just moving on to the next slide. Great, thank you. So, I guess I just want to spend the next 10 minutes or so, just to give a brief overview of the DDQ, how it came about, and just to give a bit of context around some of the questions that are included within it, and how it might be used. I guess first of all, why did Invest Europe invest time and effort into producing this useful doctrine. And I think a couple of really key reasons, one being the voice, certainly, of the European, or one of the voices of the European private equity industry, and really being at the forefront of raising awareness around ESG. It was seen as critical that we wanted to continue to push this agenda forward.

The other point to raise is that ESG and awareness has certainly increased over the last few years with various documents, reports that are out there in the public domain. Majority of which touch on the theory and the background to ESG. And I think Invest Europe were keen to try and move the agenda on a bit, in terms of providing some guidance and tools to allow private equity to actually start to properly integrate this.

So, that was really one of the key things, and I think that it’s important to note that the questionnaire is intended not to be a tick box exercise, but to be brought to life to be used by the investment teams and the management teams for those companies that are required. And we’ll touch upon that a bit in a few minutes. I think just in terms of the process, and to give a little bit of background, it was after a good few months, back in 2016, a collaborative process that resulted in the final product. And it was a number of the LPs and the GPs that are part of Invest Europe that came together, and worked together to share good practice, and the various tools, and check lists that they currently use to integrate ESG into their investment processes. Myself at KPMG, as being part of the round table, I coordinated the overall project to collate all of this information.

And we set up a core working group that comprised a number of the members, and I’ll just quickly run through those just to give you a bit of background as to who those people and companies were. So, in addition to ourselves, there was Equistone Partners, APG, Triton, Spend Capital, PAI, Advent, PGGM, EQT, and Pantheon, so a real mix of both LPs and GPs. And, as I said, those members shared a lot of the existing tools that they used in the investment process. So, that gave us a really good platform to build out the questionnaire from that. Also using KPMG’s experience in the ESG transactional environment having supported many transactions. So we brought our methodologies and insight into the process, as well. And it’s also building on existing tools in the market, such as CDC, DFG Toolkit, and others out there just to make sure that the questions were aligned and similar and building off what others had already published.

So that just gives a bit of background into how it came together and I think the overall objective of having developed this questionnaire and what the group was hoping that it would achieve would be that it provides a practical tool for private equity investment teams to use during the due diligence process. For them to identify the key ESG risks and opportunities, for them to use it as part of any additional or existing ESG processes that they have on board. So it was very much a case of this is to be used alongside the existing processes that they use. And I think, as Nick alluded to earlier, this is not an exhaustive list of questions, but it’s a focused set of questions. Typical good practice type questions that we recommend or considered during the due diligence process and also post-deal when you’re working with those companies to manage these types of issues and reports on them.

And I think that last bit is important as well. This isn’t just about the due diligence process. The framework that’s being set up to enable post transaction monitoring to help integrate those issues, the ESG issues into the ownership period and to be able to support the investment teams working with the management teams of the companies to identify the key issues, set KPIs, and put together a reporting framework. In terms of the structure of the document, and I don’t know how many of you have actually seen it, but as Nick said, it is available on the Invest Europe’s website, and hopefully you will all get a chance to look at it in due course. It sets out some generic questions at the beginning just to give some background into the companies, the targets, and their processes and systems from a business perspective.

And then it dives into ESG in the broader sustainability, government perspective looking at questions around roles and responsibilities within the company, what existing ESG framework and processes are in place. What training might be provided. Then it goes into the more specific questions, which have been broken down into environmental, social and governance. And within those, the questions have been split into two parts. And the first part of the ESG questions are what we and the members would typically see as some of the key core questions that investors and the investment team should be thinking about during the initial due diligence process. Questions to enable them to get a sense of how mature the existing ESG or sustainability framework government systems are in those target companies. But then also providing some more detailed technical questions on the E, the S and the G that could have the potential to materially impact those businesses whether they’re a financial impact or a reputational impact.

So again, those questions in part one of the guide are very much focused on those issues that could potentially have a material implication. The second part to the questionnaire lists out some more detailed questions. I think really aimed at once you’ve acquired those businesses, the deal teams and the management teams can use those questions to get a broader sense of what ESG issues there are in the business, and also opportunities. Let’s not forget there are opportunities from this agenda and it’s not all about risk management but very much to help those companies identify them and then put into place the KPIs and appropriate mitigation measures and reporting frameworks as necessary.

Nick, maybe, if you just click to the next slide, I’ll just start to give a better context around the actual questions and the sections that I’ve just previously mentioned from an environmental perspective. I’m sure you’re all familiar that environmental issues continue to be important, not only driven by public awareness but primarily regulation. Carbon, as we all know, is driving up the agenda following big public conferences like COP21, the Development of Regional Admissions Trading Schemes, etcetera, so it’s all put a focus on the need for compliance and as a result, a number of the questions in the questionnaire are very much focused on assessing those technical environmental issues that could impact the financially impact or reputationally could impact the target and therefore questions that the deal team should be considering during the due diligence process.

So I guess there are some high profile cases globally, and some of these that are here on the screen just illustrate how these types of issues can be material. The US Clean Air Act and the need to report on carbon and greenhouse gas emissions has impacted some businesses and as you can see here Hyundai and Kia were fined up to $100 million for under reporting. So that just shows the type of issues and how they can materially impact businesses. And again, the questions as I mentioned, are very much focused on drawing out those types of issues. Wastewater effluent, you see that in many businesses, many manufacturing businesses to processing businesses.

And there are financial implications associated with compliance against wastewater effluent, for example, here in the UK, we’re starting to see greater fines being handed out by the courts for environmental pollution. And last year, Thames Water Utilities Company was fined up to £1 million for a pollution incident. So these are the types of issues that the questions look to help the deal teams identify and address in that due diligence process. I mentioned earlier, this isn’t just about risk management, it is also about looking at potential opportunities that the companies may have, whether they’re already doing that or have the potential to improve potentially operational efficiencies through energy reduction, waste minimization, more resource efficiency and we’re starting to see many more case studies coming out in companies where they’re able to demonstrate the financial benefit of improving performance through the ESG agenda.

Moving on to social. Nick, if you could just hit the next slide, please. So the questionnaire also set out various questions to identify potential social issues. Now, under social, obviously health and safety which everybody is familiar with, is a significant issue. So there are various questions that identify or help to identify how those companies are dealing with safety, what processes and systems they have in place. I think it’s important to say that often social issues are somewhat or perceived that they aren’t tangible. But here there are some case studies you can see that failure to comply with the relevant safety regulations can have implications and financial implications and can impact reputation. Hugo Boss, clothing retailer here in the UK was fined 1.2 million recently for failure to implement a robust health and safety management system throughout its stores. Unfortunately, the incident resulted in a fatality in one of its shops. So that just brings to life how serious and important these issues are and that they should be considered certainly in the due diligence process.

The questionnaire though does go beyond safety. I think it is fair to say that the social aspect is ever increasing, the scope of issues is broadening; certainly around issues such as child labor and working conditions, and certainly those areas within the supply chain, as well as companies supply base expands out into emerging markets and other areas. These types of issues are becoming more prevalent and in need of identification and management. You may be familiar with the Rana Plaza incident in Bangladesh, where many clothing companies were using a supplier out there to manufacture their garments. And unfortunately, because of various quick measures to erect the building and other short falls in the construction and development of that site, it collapsed and had very fatal consequences. As a result, many of those companies that were involved in that have set up compensation schemes and from a positive perspective, have put together more robust codes of conduct in terms of working with their supply chain, etcetera.

So again, these are the types of issues that should be considered as part of the social aspect of ESG when doing the due diligence. I think it’s also fair to say that it does present opportunities as well and Nike, for example, working with its supply chain being more transparent and disclosing information on that has reputational benefits and we’re certainly seeing that across many other companies.

If we just move to the next slide and just to touch on governance. Again, the questionnaire lifts out various questions to help the investment team identify essentially how well run the businesses are, how risks are managed, how they’re integrated and controlled. And we’re not just talking about ESG governance or sustainability governance. We’re talking about corporate governance. Everything from how the board is structured through to diversity on that board, remuneration, independence, etcetera. So the questions are geared to give the teams an ability to assess how well run those companies are and whether there are any improvement opportunities to enhance the governance structures at those companies. Again, there are some case studies there where governance issues have caused financial and reputational impacts to the business.

Here in the UK, TalkTalk was recently fined £400,000 for a cybersecurity breach and we’re hearing more and more stories around cybersecurity, anti-bribery and corruption, etcetera. So, the questionnaires are geared to help address or certainly identify those types of issues and to provide the teams to essentially develop improvement programs and to work with the management teams to enhance the overall ESG standard of the business.

If we can just move to the last slide and to wrap up. I’ve already touched upon the fact that Invest Europe hopes the questionnaire isn’t just used as a tick box exercise during the due diligence process but is used post-deal to help work with the companies, work with the management teams, develop appropriate ESG reporting frameworks, identifying the key material ESG issues and putting in place relevant KPIs to enable them to monitor and improve performance in those areas.

And I think one of the key things around ESG is the disclosure and reporting of what those companies are doing and how the investment teams that have backed those companies, how they’re integrating ESG into the process and into their businesses. And I think it’s extremely important that those frameworks are put into place to enable greater disclosure and transparency in reporting to not only LPs but to their employees, to the public and to broader stakeholders.

I’ll pause there for now and happy to take questions, although I think Nick said that was best left till the end. So, Nick, shall I hand back to you?

Nick Donato: Yes. Thank you, James. Highly informative. In fact, a few questions already starting to come in. I was going to save them for the end but I see no reason why not to incorporate them into a few questions I had for the panel. Let’s make this live. Let’s make this interactive and let’s make it fun, so by all means, if there’s any point that sparks some curiosity on your end, send your questions through that GoToWebinar tool. Speaking of which, in that tool, we have sent all attendees a link to the ESG questionnaire so just hit that little plus icon on the chat box and you should receive that link. All right then, this is a nice warm up question to get the conversation going. We have someone asking about if the new US political regime will have a negative impact on responsible investment trends or if I were to paraphrase that, may Trump dampen enthusiasm for responsible investment here in the US.

Blaise Duault: Okay. From Paris prospect and you’re probably aware of the reputation of Donald Trump from Paris, we are however convinced and we have received strong messages from the prominent corporates in United States regardless of Mr. Trump’s personal views, which comes actually to be changing all the time, we have a strong certitude. We have a strong confirmation that the most prominent corporate and biggest companies in US are fully in line with a conclusion of COP21 for instance, and are fully aware of the impact of ESG. So, as far as I am concerned, I am totally confident in US globally, I would say.

James Holley: Well, I just wanted to add and this is a James Holley view rather than a KPMG one. I think, and as Blaise touched on and we mentioned earlier, carbon and climate change is an extremely important topic but for me, it also comes back to just simple risk management. And regardless of the regime and the systems that Trump will put in place, companies in the US, I’m assuming, will still have to comply with the relevant safety, environmental, social and governance regulatory framework that they have in place. So ESG is about investors being aware of those types of issues and ensuring that companies continue to comply with those. Because as I was trying to allude to in my presentation, failure to comply even with the minimum standards, the regulatory regime can have financial reputational impact, so I can’t imagine that companies will certainly stop complying. So for me, I don’t think it will be a huge, huge impact.

Nick Donato: Yeah, and I would agree with that. What’s causing the trend of responsible investment in the US? It’s not then a political phenomenon. It has been a bottom up approach of pensioners, of college endowments, who have been demanding this from their asset managers and that has trickled down to the fund managers themselves who now appreciate the risk management that we’ve been talking about here. Another question, Marta, I want to loop you in here. To what extent does ESG influence your fund commitment and investment decisions? I mentioned earlier that something like one in four investors are now willing to reject a fund manager on ESG grounds. So you are embedded in the LP community. What is your sense of the trend?

Marta Jankovic: Well, before I jump to that answer I’ll just briefly address also the question about the change of administration in the US and what the impact would be. Besides climate change, I think social issues are something that is really important. And I see that the social issues that arise from inequality, for example, are something that was also driving to some extent the result of the elections, so I believe that focus on inequality and that means focus on labor standards and also things like the minimum wage or the living wage, if you like, are going to just grow in the future. I would tag on to what James said about minimum standards but don’t just look at regulation and watch the environmental framework as in terms of what the regulator expects. But think beyond that, think ahead of the curve because a reputational risk can come also from breaching something which is not written down in law and it can cost you a lot. It can cost you even if your business is only a B2B model even when there is no consumer visible in the whole picture, because it can impact on the actual… If you’re supplying products or services to a business that is facing customers, you might not be the partner that they would like to see. So think about all of those things, think about the society as a whole.

Nick Donato: And then, Marta, your thoughts on what I mentioned earlier that something like one in four investors are now saying, “I’m not signing with you if you’re not thinking hard enough about ESG.” What’s your perspective as someone who’s embedded in the LP community? What’s your sense of it?

Oh, hello? Well, we may have lost Marta, but nonetheless, Blaise, I want to kick this over to you. If you can put in your own words, what’s driving the force behind these ESG trends from the perspective of the GP, of the fund manager?

Blaise Duault: Different causes. Historically, I would say that given our business background, it was pure marketing intention at the very beginning. And since we are progressing into those wide areas, we are just touching the spirit of ESG and more and more encompassing the more consistency approach, a more reputational approach, rather than pure marketing and business approach. So I would say first it was a catch up under the gentle pressure from prevalent LPs, the most important LPs in the worldwide community are for sure the biggest pension funds. We have experienced, in the last 10 years actually, a rising awareness about reputation risk, because in turn they also try and gain additional pensioners and in order to do so, they have to address the most critical issues and questions among which we have ESG. So starting from this reputation view, it expanded all over the community and accordingly, the GPs.

Having said that, as far as France is concerned and probably other countries, you are probably aware that we have in France a specific reputation, probably due to the fact that in our public opinion, people are prone to be quite challenging when it comes to describing our industry for a valid reason and possibly due to the lack of communication we experienced in the past. So it is for us, a huge opportunity to try and better understand our main stakeholders in France since actually when it’s come to making transactions and investment, the company we are investing into are supposed to create value that will be shared among not only the management teams but also more and more importantly the employees who are part of the deal in a number of transactions and more and more. And those future rich employees will become pensioners that will in turn a few years later invest into pension funds and so on and so on. So, we are part of a huge economic wheel, if I may use that word, and the consequence of that is that we have to be fully consistent in the way we act when it’s come to making transactions or manage portfolio companies and the way we interact with all our surrounding stakeholders, not only the employees in the portfolio companies but also the media, the political leaders, and of course our investors.

Nick Donato: James, I want to loop you into here. When you were creating this DDQ and I suppose this is an open question to all, was there any envision of how fund managers are going to relay this information in this ESG work to their investors. Is it conceptualized that they will have an ESG section on their quarterly report? Is it something that they would report into the LPAC or are you just relying on fund managers to take a “suit what’s best for them” approach.

James Holley: I’ll just answer this from what I’ve seen working with various private equity clients. And I don’t think there’s necessarily a standard one way to do this and to report. I think it’s important that private equity investors consider the needs of their companies, consider the needs of their LP, their KLPs and then divide and develop a reporting structure that appeases all of those, if you like. So it does feel like quarterly reporting, certainly with some of the clients I work with, is becoming good practice and an annual investor relation conferences or AGM type scenarios is where it’s reported, but it is important to stress that the structure should be set up and to consider the company’s needs. Because it can be a burden on some of the smaller companies that don’t have the time and resources to invest in putting robust systems in place. So it needs to be a careful balance.

Marta Jankovic: Can I add to that, if I may? That what we’re seeing and what is actually happening is that LPs are asking for reporting in a more systematic way. So, for example, APG Asset Management, if we’re committing to a GP, we have a mandatory requirement that you would like to have annual reporting, ESG reporting in place. And we have developed a template that we use for that purpose that our GPs would receive and we would then include it also in the side letter. So this is something that I think is very serious for managers to be prepared for and we want portfolio by portfolio company reporting. So that means if using a due diligence questionnaire like the one we’ve got here and you’re monitoring companies and you’re able to extract a couple of KPIs, that is really essentially a very good start. So I’d say reporting is really moving into the center, for LPs that are keen on demonstrating to our own clients and beneficiaries that ESG is being done properly during the life of the fund.

Nick Donato: Marta, that’s interesting because something that we heard earlier from James was that the S and the G of ESG are not intangible as the E, that it’s difficult to quantify. We could have a portfolio company say we’ve cut carbon emissions by 25% this quarter, which is great, but how do you measure something like if the workers are happy or if their corporate governor’s stance are in place. So when you create this reporting template how did you tackle those challenges?

Blaise Duault: Well as far as we are concerned at PAI, I’m not fully in agreement with your views, I think we can measure things. It’s just a matter of balance between what we measure and often consider as weak signals and an overall assessment based on those weak signals, which is something else, which is more qualitative. And probably more, the spirit of the questionnaire which we are talking about here, that still in the social area for sure, and as far as we are concerned as GPs when it comes to investing into companies, there are at least two social indicators which are on one hand available, which has been available for a long time now, but which are under the scrutiny of any reporting teams is work accidents on one hand and absenteeism on the other hand. So those two indicators are quite interesting in order to assess the level of many issues in companies from motivation, disorganization, management issues and so on. So as soon as we got indication in those signals, it is the starting point when we would have to dig into further in order to understand what’s going on.

Marta Jankovic: I think I had some connectivity issues here. My apologies. And maybe I’ll tag on to what Blaise just said. In that, I think social issues are extremely important to investors. We deploy our capital because we want to demonstrate social responsibility and that is, environment is one part of that. But social and governance issues are just as important. And whether or not you have quantitative information, is not so crucial, it’s crucial to show that something is being done, and that can be also done in a narrative form. So, it doesn’t have to be how many lost time injuries, how many people you let go or hired. That’s all important. But human rights, sometimes we just can’t translate into numbers, and you’re not supposed to. And that doesn’t mean that they’re not…

Nick Donato: We may have lost Marta again.

James Holley: Sorry, just to add to that. And I think as we mentioned earlier, the questionnaire won’t necessarily tackle all of the potential risks and issues. And as I’ve said, needs to be used in line with or in parallel with other existing tools that are available. And I think certainly, there are even basic employee type surveys that companies use it to gauge how motivated the workforce are excellent and simple, and practical ways of doing that. Even safety culture, there are now tools available that allow you to assess the culture, the safety culture, how well safety is embedded into the organization through various tools. So, there are some really useful and practical solutions out there as well.

Nick Donato: And then, a few more questions I want to get through. I know we’re bumping up close to the end of our time. But something that I hear a lot of managers talk a great ESG game, and they may look at the DDQ, they may incorporate some of the elements into their investment policy, which is great. But then, on the other side of the negotiating table are the LPs, and some of them have told me that they’re not always sure how they separate the GPs that talk the ESG talk and those that actually walk the walk. So, does anyone have any best practices here for really determining who’s taking this ESG mindset that we’re calling it seriously?

Marta Jankovic: Maybe as an LP, I will take this. And just to say that we have an ESG assessment tool that we’ve developed in-house, which is really looking under the carpet of the GPs’ ESG integration. So, if you have APG as your LP doing diligence, you will get to answer a lot of DDQ questions but these questions will be evaluated. And also, we have face-to-face meetings with the GP. And I think it’s pretty hard to hide something from an LP who has a lot of experience with this type of diligence. So I think to those GPs, I think you can just copy-paste. My message would be, don’t do it because it will look really bad. And I’ve had some…

Nick Donato: We may have lost Marta again. But I want to get through one last question and Blaise, maybe this is best directed towards you is that, for me, I wonder, we have this ESG DDQ and we have new tools to assess ESG factors at target portfolio companies. Is there any type of expectation of what a fund manager must do after ESG concerns are identified? So you see that the problem exists and you may have seen that problem by using the DDQ. But their action steps are expected. Does it fall on you? Is there a fiduciary duty to respond to them?

Blaise Duault: No. Actually, it is quite connected with the previous question and actually, I will start by going back to that question and then answer your last question. As far as the talk you talk or walk the walk are concerned, and as far as we are investing into limited companies as the LPs are investing into GPs, we are obsessed, if I may use that word, by the consistency between words and acts. For us, it is as important to talk and to act. It is important that in our word, our portfolio companies cast promises and have strong commitments first. Because for us, it is an indication of the quality of the governance that we have in place. The fact that we have at the top management in those companies, people who are aware of the global concerns, the global nature questions in society.

And you cannot escape those questions. So we expect a strong stance from the management of those portfolio companies. And so, accordingly, we expect them to talk. But then we expect them to walk and we expect them to be consistent with a promise and to execute what they’re committed to do. And as far as the second question is concerned, of course, should the people involved face a tricky situation, that they just cannot hide it, they have to address it because… And it’s not obvious in certain portfolio companies. And it was not obvious at GPs like us at the very beginning because we had to move from an historic stand which was more confidentiality driven in a sense. Let’s pretend that we ignore it and it will be okay. You cannot have that stand any longer unless being challenged or accused of negligence. So you are obliged to acknowledge the issue and to deal with it.

Nick Donato: I think that’s right. And it’s going to be felt more and more in the mid-market in the time to come, as mentioned at the start of the webinar. Well, I think we’ve gotten through all of our questions, or most of them. If we were not able to get to one of your questions, please reach out to me. I’m happy to put you in touch with any of our three speakers. I want to thank them for joining us today. And I also want to thank Invest Europe for partnering with us on this webinar. I also mentioned at the start is that a recording of today’s broadcast, including the slides, will be emailed to you in the coming days. And if you’d like to learn more about Navatar Private Equity and how we can help you manage the investment process, including creating some workflows for ESG Management, please do not hesitate to reach out. You can see my contact details there on that last slide. So, on behalf of Navatar and Mother Earth, I’m Nick Donato. And enjoy the rest of your day.