Management is ultimately accountable for business decisions and should represent the stewards of ESG resiliency in an organisation. “Good governance in real assets comes through clearly defined board practices,” says Patricia Rodrigues, an ESG specialist who sits on the boards/committees of a number of infrastructure fund managers. “Investors and fund managers need to have a long-term strategy about key topics to be covered by the board and sensible frequency.”
Putting the right structure in place is important. Axel Brändström, head of real assets at Swedish pension fund Alecta, says that “it is essential to have a formalised ESG committee and a person responsible for ESG within the company or on the asset management level, to secure good governance of ESG issues”.
Diverse and inclusive boards have been shown to deliver positive ESG impacts; different past experiences and fresh perspectives make for more innovative and creative teams, while DE&I also showcases commitment to the social side of ESG. “Diversity-wise, ESG leaders at fund managers to date have mostly been females,” adds Rodrigues.
Asset manager Igneo Infrastructure Partners lists diversity as one of its five minimum standards for ESG performance, while last year The Carlyle Group set itself the target of achieving 30 percent diversity across all its private equity portfolio directors by 2023. Approximately 50 percent of Carlyle’s total assets are currently managed by women, while over 200 portfolio company board seats have been filled with diverse directors.
In September 2021, manager Partners Group updated its board diversity policy, ensuring that newly elected independent directors are comprised of at least 50 percent of the following three groups: non-(cis)males, individuals from the LGBT+ community and under-represented ethnic minorities. Aiming to address gender imbalances in its financial analyst programme, the firm also set targets in 2018 to increase the number of female partners and managing directors to 25 by 2025.
Similarly, LPs are taking action to tip the scales in a positive direction. In 2017, Ontario Teachers’ Pension Plan made a commitment to reach 30 percent female representation across all 300-plus board seats among the more than 100 private portfolio companies the LP controls, including infrastructure companies. The pension fund achieved the goal last year and stresses the 30 percent is a floor rather than just a ceiling.
Holding to account
Proxy voting is another approach that OTPP has adopted, giving shareholders a voice to directly influence and control investments. Electing directors, appointing auditors and sharing views on executive compensation are all ways that the Canadian LP holds firms accountable and ensures more robust governance practices. Voting decisions and rationale are also published before each shareholder meeting.
This is an exercise in transparency, which is not something to be taken for granted when it comes to business ethics. The improvements in reporting that we are seeing – for example through the adoption of appropriate frameworks such as the TCFD or the SFDR, which are helping to standardise and benchmark ESG performance – are undoubtedly strengthening governance practices, providing data to back up claims.
“Transparency through improved disclosures and reporting, as well as accountability for delivery, are essential to maintaining trust and mitigating the risk of greenwashing,” says Kristina Kloberdanz, chief sustainability officer at Macquarie Asset Management. “Managers need to do what they say they will do and have the performance data to back it up.”
Jon Collinge, sustainable director at New Zealand-headquartered Morrison & Co, agrees: “We believe that the adoption of independent assurance over disclosures and metrics to ensure they are complete, demonstrable and fully explainable is essential for good governance in real assets.”
Committed to the cause
Nowadays, asset managers and portfolio companies are cognisant of the reputational and regulatory risks of not integrating sustainability considerations into business decisions. Indeed, most are driven to act by the clear value-creation benefits of an effective ESG strategy. Nevertheless, there is evidence that company boards are not doing enough to tap this opportunity.
A 2022 survey by EY of 200 business leaders and board members emphasises just how critical corporate governance is to the long-term success of integrating ESG. When asked to choose the internal factors that had the greatest impact on their ability to generate long-term value through ESG, the highest-scoring issue was the “lack of commitment from the board to make decisions that fully integrate ESG factors and create long-term value”, cited by 43 percent.
Interestingly, when the same question was asked in 2021 (to 100 respondents), this factor was stated by only 28 percent. Obstacles such as “lack of internal processes” and “limited board diversity or knowledge” also scored highly in this year’s survey.
This has to be where real assets fund managers can step in and help to guide portfolio companies, acting as custodians of ESG principles and helping portfolio company boards to formulate achievable and long-term plans for value-enhancing sustainability.
For Marco van Daele, co-CEO at Switzerland’s SUSI Partners, active engagement is key. “You have to use the governance tools at your disposal, which means being an active member on the board of portfolio companies and making room for environmental and social initiatives in the budget, setting concrete targets, and making performance remuneration relevant.”