ESG Investing Frameworks

What do you think is the biggest challenge for asset managers, in taking up an impact framework?

It’s just being consistent. It’s really not rocket science; it’s not difficult. But the portfolio managers are already really busy and there’s a lot of risks to consider. Everyone has a job and a half and it just adds another layer of work and it’s a new skill set, as well. I understand that it’s an exercise that the whole company might not even believe in, at the outset. I think, as long as there is some consistency built in, in working with the asset manager, for example, to say, listen, this is why we’re doing this; we’re trying to keep it simple; we’re trying to keep it light touch for now. But you do need to check in with your investees or your customers, on a regular basis, when you’re doing your other diligence or reporting or monitoring. It’s quite easy just to add a set of questions for them to report back to you. Then it’s just starting with a simple Excel; I don’t think they need to invest tons of money in having their own software or their own impact reporting database. We can start in Excel and then just track it, regularly, across the strategies, across the portfolios.

So they just need to be clear on where each of those portfolio companies stand, with regards to ESG factors, to begin with?

Normally, it’s very simple. The first few, we just set a baseline. Often, the questions are binary, such as, do you have an environmental management system? Do you measure your water usage? Normally, it is just, let’s find out where we are and then try to build on that a little bit, year on year, without coming with a crazy set of 300 impact questions and then really putting the investee and the investor on the spot and then often turning them off and, potentially, losing the business.

If we take climate change, how would you would approach building a framework with a client?

For one of the private clients I work with, like Tech For Good, he is an impact investor. He doesn’t like to call himself an impact investor but the social impacts are always very important in the investments that he makes, that I help him with. Often, the origination comes from the clients directly. If I get approached by somebody looking for a particular sector or space, then I make a lot of connections, but it really depends. Often, this investor will have an idea in his head; let’s say it’s a European, small tech start up, that wants to have a consumer good that’s better for people, like a healthier make up or shampoo brand. Some kind of a consumer good that has a cleaner set of ingredients, is in packaging that is not plastic, has some kind of proprietary technology, maybe including some biotech elements.

So the origination will come from the investor and the first thing I will do, is help to diligence the opportunity, if it needs a layer of additional finance diligence. Often it’s very technical, so if it was biotech, or if it was very much about the ingredients of what is in the shampoo, for example, we will rely on technical expertise, as well. I think that’s quite important. We will combine the financial and the technical expertise, to complete the diligence and then come up with a valuation that we think make sense, vis à vis what the investee wants or what the company is proposing.

They are usually far apart, frankly. I think, just the nature of the market today, maybe less so in impact, but certainly in the traditional private equity space, as I mentioned, there is tons of cash, chasing opportunities for just absurd valuations. We try to reconcile that a little bit, by not chasing the companies that everyone else is chasing. We’re looking at either earlier stage or smaller deals or from different sources of origination.