Beyond compliance

Q: When did ESG become a formal part of EQT’s investment strategy?

TL: The key word here is ‘formal’. EQT was established in 1994, but before that we’ve had a much longer history of working with the Wallenberg family, for whom the social contract is primordial. So EQT is founded on a very strong set of values.

As requirements around reporting and transparency increased in the late 2000s, we felt the need to formalise and articulate the way EQT was working with sustainability themes throughout the investment cycle, an endeavour we concluded in 2010.

The move was not led by any particular corporate social responsibility department – we didn’t have one at the time. Rather, it was driven by the investment advisory professionals: much of the work we put into evaluating a business goes into assessing whether its culture fits well with EQT’s overall investment and ownership philosophy.

Key to this effort was the notion of integration: people from all sides of the company contributed insights to our responsible investment (RI) policy. That made it much easier to understand how this agenda affects different parts of the business.

Q: ESG can sometimes be an abstract concept. How do you keep track of progress?

TL: When we designed EQT’s RI strategy, we defined three core KPIs: whether ESG themes are included in EQT’s investment recommendation materials; whether portfolio companies raise these issues during board meetings; and whether they have a sustainability-related policy or code of conduct in place.

I’m pleased to say that we’ve hit the 100 percent mark on the first one and we’re close to it on the last. There’s a bit more work to be done on the second. There, portfolio companies within all EQT investment strategies stand at about 85 percent, which is one of the reasons why we developed the EQT Sustainability Ownership Engagement Blueprint in 2015.

The idea is to move the ESG agenda beyond compliance: rather than a box-ticking exercise, we try to inspire the portfolio company boards and management teams so they address sustainability themes through innovation and new solutions.

Q: Are ESG issues more salient in an infrastructure context?

TL: The ESG agenda is very closely linked to the nature of infrastructure assets. So I see a lot of positives coming out of the asset class because infrastructure operators are looking after assets that provide essential services to society.

Challenges like reducing carbon emissions require a meaningful leap in terms of thinking and philosophy. And that’s where private equity, with its emphasis on alignment of interests, has a role to play.

On issues like health and safety, infrastructure is well advanced. In these areas, we can definitely learn from infrastructure companies.

Q: How do you make sure the teams have ESG constantly in mind?

TL: EQT has grown substantially over recent years, with a lot of new people joining. We have a substantive introduction programme for new employees, of which RI and sustainability form a meaningful part. That includes our view on the market, what EQT is doing to remain on top of ESG issues and why they matter in an investment context.

All EQT investment advisory professionals integrate these issues when they perform due diligence on potential investments, write investment recommendations and monitor assets post-acquisition. My team is in continuous dialogue with them. However, we also follow up more formally on an annual basis, when the investment advisory teams sign off what the portfolio companies report and present the outcome back to us.

Recently, we’ve also appointed internal RI ambassadors in the various investment strategies. Our ambition here, as with the rest of our sustainability efforts, is to get the ESG agenda embodied by every EQT employee.