Global Summit: Potential damage from breaching social contract ‘outweighs costs of ESG’

Standardisation may still be a work in progress but fund managers are already seeing positive outcomes from ESG initiatives, both in terms of social benefits and financial returns.

The risk of not focusing on ESG far outweighs the cost associated with it, a panel of experts told attendees at the Global Summit on 18 March.

“It is a cost, I’m not going to lie,” Valeria Rosati, senior partner at Vantage Infrastructure, said, addressing one of the concerns expressed by those who are sceptical of environmental, social and governance issues.

“The fact that everyone here has been funded to attend this conference, it’s a cost to your businesses,” she continued. “The fact that there’s more and more expertise that needs to be employed by LPs, fund managers and asset consultants to understand how to assess ESG and how to integrate is part of that cost.”

However, Rosati stressed that “the single most positive impact is the avoidance of breaching the social contract”.

She drew on her firm’s experience, noting that aside from preserving one’s social licence to operate and protecting against reputational risk, an “active focus on environmental factors in our portfolio companies” had led to savings for both the company and the consumer.

Tobias Reichmuth, chief executive at SUSI Partners, agreed. “What we’ve seen at SUSI is that our first fund, a renewables fund, is generating double digits,” he said, referring to the SUSI Sustainable Euro Fund, a €60 million-vehicle launched in 2011. “When you look at the investments we’re making in energy storage, our first three are generating 9 percent unlevered IRR, so you can generate good returns.”

Reichmuth also explained how the Swiss firm measures the ESG-related impact of its investments: “We measure the CO2 savings per investment. Every investor at the end of the year gets a certificate. So, if you invest $50 million with SUSI, you know how many tonnes of CO2 you’ve saved. So there’s real tangible value behind it.”

Although each of the three firms represented on the panel – Vantage Infrastructure, SUSI Partners and  Partners Group – have developed approaches to measurement, standardisation of that measurement remains a work in progress.

Esther Peiner, managing director of Partners Group’s investment team, said that until that happens and until an ESG track record has been established, LPs would be advised to do as follows: “When you see a [fund] manager that claims they are ESG-compliant, ask them: where in the board meeting is this on the agenda? Is it under the top five or is it under ‘any other business’?

“Ask them about how many new products or initiatives they’ve driven from an ESG perspective. Ask them where the ESG reporting goes. Do these guys report four layers up to the chief risk officer or do they report to a value-creation unit within the firm? Look at the seniority and the views that everybody on the general partner side has on ESG. Is it something the founder is highly convinced of and speaks about very frequently? Or is it just two people within a very big investment engine?

“It’ll be the efforts and initiatives that we all do to ensure that we show transparency and that we collaborate when it comes to agreeing on how to measure and assess ESG [that will enable us] in five or 10 years to look back and talk not only about risk-return but also about an ESG track record.”