For infrastructure managers, conversations with portfolio companies are something to be embraced, particularly when instigating a new ESG strategy. Without top-down integration, and convincing leadership of its merits, firms are unlikely to weigh sustainability into decision making or factor in long-term risks and opportunities.
“The reason I have regular dialogue with portfolio companies is that I want to understand their challenges, what is happening at the asset level and where they need support,” says Sabine Chalopin, head of ESG, sustainability infrastructure at energy transition specialist Denham Capital. “It is very much about creating a dialogue.”
Inculcating ESG into portfolio company culture is an important recipe for success. Apollo Global Management recently launched a training programme for employees sitting on the boards of portfolio companies, and last year began hosting ESG-related webinars led by subject-matter experts – all available to portfolio companies.
A company culture that encourages open and honest communication is not a given, and investors agree that it has to start from the top. “To build on what [business management pioneer] Peter Drucker once said, ‘Culture eats strategy – and a code of conduct – for breakfast’,” says Jonathan Levitt, manager, business integrity, sustainability at fund manager Actis. “When leaders act with integrity, and create a culture of openness and trust, where ethical concerns are raised and discussed in good faith, this contributes tremendously to identifying and resolving potential risk issues before they can have a material impact on an organisation.”
Last year, Blackstone Infrastructure Partners began ensuring that all of its portfolio company leadership reported to their boards on ESG, after first trialling the policy across its real estate business. The initiative encourages portfolio firms to examine their existing practices, before creating and tracking relevant KPIs that match Blackstone’s broader ESG goals as well as sector-specific metrics.
The need for meaningful communication also speaks to the nuanced differences that exist at a company level, let alone sector level. “A broad-brush approach might be needed at the level of investment manager that needs to apply the same policies, standards and processes across their portfolio companies,” says Silva Deželan, ESG director at alternatives firm Stafford Capital Partners. “But the results of these processes will be different for each investment and require a tailored approach when defining ESG actions, milestones and targets for portfolio companies.”
John Anderson, global head of corporate finance and infrastructure at Canadian insurer Manulife, echoes the point. “We may ask a broad set of ESG questions, but each portfolio company answers in the direction that is most appropriate for its business, and their sustainability programmes end up reflecting the specifics of their operations,” he says.
An equal conversation
Like any proper dialogue, the exchange goes two ways, and many portfolio companies are actively reaching out to managers for support and advice. “We are getting approached by management of investee companies looking for solutions, because they recognise that there is a need to shift to net zero; it is a very different conversation compared with 10 years ago,” says Dan Watson, head of sustainability at Amber Infrastructure. “That makes our life much easier as we are able to focus on taking action.”
Some of the UK manager’s portfolio companies engage with it directly because they want to apply for sustainability-linked loans and seek advice.
“We can help them to develop policies and processes, or we can support them in appointing third parties who are able to deliver the work,” adds Watson. “We try to guide what KPIs and metrics should be incorporated by our investee companies. By aligning disclosures, we aim to reduce the reporting burden for them whilst delivering information wanted by our investors.”
Joost Bergsma, founding partner and CEO at Glennmont Partners, has had similar experiences collaborating closely with solar companies in Southern Europe. The clean energy specialist works with management to ensure their solar panels are built in a sustainable manner, particularly with growing concerns around Chinese labour.
“We employ a self-certification procedure and questionnaire that we use with our supplier chain,” he explains. “People respond very well to this process; they understand that is important to source materials and equipment in a sustainable manner.”
More and more portfolio companies are creating an ESG action-plan. Chalopin says that if there is little appetite for sustainability or firms are not going to support the top-down strategy, “it is definitely a warning sign”, particularly when thinking about acquisitions. Each portfolio company has an ESG team at Denham Capital and the topic is discussed regularly at the board level. “It really is a team effort rather than just instructing them [on] what needs doing.”
Cleared for take-off
Through targeted engagement, one manager was able to set out an ambitious ESG plan for its airport asset
The sustainability journey of Perth Airport in Western Australia is a prime example of dialogue in action. In early 2021, specialist infrastructure manager Morrison & Co organised a series of shareholder- and management-only meetings and workshops after experiencing a lack of alignment between the board and shareholders on ESG ambition and strategy.
Following engagement and factoring in shareholder feedback, management published a new set of short-, medium- and long-term sustainability targets. By 2030, Perth Airport has pledged to become net zero, decrease waste sent to landfill sites by 20 percent, increase recycling by 75 percent and draw 50 percent of its energy use from renewables. The company also set diversity and inclusion goals and became the first airport in Australia to include indigenous names in passenger flight information display screens.
“We manage multiple infrastructure funds, and we take an unusually hands-on approach by creating bespoke ESG programmes that are appropriate for each fund and its investor base,” says Jon Collinge, sustainability director at Morrison & Co. “We acknowledge each of our portfolio companies is at a different stage of progress and we want to take them on a journey that fits with their assets and stakeholders to create a long-term sustainability programme.”