ROBECO PRIVATE EQUITY ESG Engagement Report 2016 FROM ESG INTEGRATION TO IMPACT MONITORING

Transcription

1 ROBECO PRIVATE EQUITY ESG Engagement Report 2016 FROM ESG INTEGRATION TO IMPACT MONITORING

2 Robeco Private Equity Authors Silva Dezelan, PhD Nicky van t Hof About Robeco Private Equity Robeco Private Equity is the private equity division of Robeco that was founded in Based in Rotterdam and London Robeco Private Equity offers institutional investors private equity solutions with a focus on sustainability. Its strategies target high-quality investments, diversified across investment stages and sectors, with a focus on the European Mid-Market private equity segment. Through Robeco Private Equity s diverse offerings, institutional clients can gain exposure to primary private equity funds, secondary private equity funds, and co-investments in selected private companies. As one of the first investment managers to launch a private equity strategy with an ESG engagement program, Robeco Private Equity is one of the leaders in ESG integration. 2 ESG Engagement Report 2016

3 Contents Executive summary 4 1. Introduction 6 2. Recent ESG developments in the private equity market ESG performance Overall assessment results Insights acquired from the annual survey Responsible Investment Policy Managing ESG incidents Responsible Investment Objectives Responsible investment in placement documents ESG in the investment process ESG monitoring and reporting 14 Tips for successful ESG Integration Case study: Pegasus Capital Advisors Analysis of ESG alerts and incidents ESG issues in focus: carbon emissions & supply chain risks Impact measurement and Sustainable Development Goals Concluding remarks 32 ESG Engagement Report

4 Robeco Private Equity Executive summary Private equity managers are increasingly embracing the integration of environmental, social and governance (ESG) factors in their investment process. The number of managers committing to the Principles for Responsible Investment (PRI) is growing steadily and the PRI signatories now represent an active community that helps in raising industry standards on ESG integration. We are pleased to report that the private equity (PE) managers in Robeco Private Equity s ESG engagement program have shown further progress in this respect, too. We base this on the assessment of their ESG efforts in 2016 which reveals improvement in both the average and the median ESG scores for the program as a whole. This year, we again used the PRI reporting and assessment tool to collect and assess the relevant information from the PE managers. Compared to a year ago, more PE managers in our ESG program (95%) now have a responsible investment policy in place, determine ESG objectives and include ESG matters in their fund formation documents. The number of PE managers which are monitoring whether their portfolio companies have the relevant sustainability policies in place increased further in 2016 and 74% of them now monitor at least part of their portfolio. While the percentage of PE managers that disclose information on ESG to the public remains below 15%, we have noticed that an increasing number of them are disclosing more specific and detailed information on the environmental and social impacts of their portfolio companies. Public commitment to the PRI seems to have a positive impact on the ESG efforts of the PE managers as we again found that the PRI signatories in our program outperformed the non-signatories. Relative to the broader PRI universe of PE managers, the participants in our program show less involvement in different industry initiatives and are less inclined to act upon the sustainabilityrelated long term trends. Our program s bias towards the lower mid-market buyout and resource efficiency-focused managers, who typically have less resources available for such initiatives, can partly explain the difference in scores. An interesting exception is a resource efficiency-focused PE manager whose ESG integration journey we present in Section 4 of this report. Most PE managers in our ESG program indicate that they have a process in place to identify and manage incidents that occur at portfolio companies. In the course of 2016 we were not informed about any such incidents by the managers directly. However, the results of RepRisk, a specialized media-search tool indicate that the companies owned by the PE managers in our engagement program are not immune to ESG-related issues. While the vast majority of these companies were not involved in any ESG incidents in 2016, some 7% of them had limited exposure to reputational risk due to ESG related issues. These companies are active in the food production, fashion and retail industries, the sectors that are more susceptible to ESG risks. Supply chain issues, violations of national legislation and product recalls are some of the most common issues we encounter. 4 ESG Engagement Report 2016

5 To raise awareness of the abovementioned and other emerging ESG issues, we have devoted our second ESG roundtable to the importance of dealing with supply chain issues and to portfolio decarbonization. The roundtable provided some new insights into how PE managers can assess carbon emissions and manage the supply chains of their portfolio companies. The French Initiative Carbon 2020 and open discussions at the roundtable demonstrated that the PE community is willing to work together on ESG matters. Increasing numbers of PE managers also acknowledge the importance of the UN Sustainable Development Goals (SDGs) for their business and many recognize the potential benefits of aligning their investment practices with these global goals. However, most GPs are still highly uncertain about how to translate them into investment practices and outcomes. Also, they still lack the necessary tools to assess the progress made on the goals. Despite the difficulties, more and more PE managers in our ESG program have shown that it is possible to quantify the environmental and social impact of their portfolio companies which can then be linked to the global goals. We expect this trend to continue as more standardized metrics become available for SDG reporting. Our latest ESG survey and assessment results provide a number of insights that we will use in our dialogue with PE managers in our ESG program. We will continue monitoring their ESG efforts on an annual basis and focus our discussions with them on more specific ESG topics going forward. In particular, we see an increasing number of ESG issues that portfolio companies will need to address in their operations as a result of long-term trends and increasing regulation. Through our ESG engagement program, we create awareness for these issues and encourage the PE managers to act upon them. ESG Engagement Report

6 Robeco Private Equity 1 INTRODUCTION 6 ESG Engagement Report 2016

7 In many respects, 2016 was a special year. Take for example Brexit or the election of Donald Trump. As part of the global transformation processes, a sustainability revolution is also underway, according to Al Gore. Private equity remains an important part of the transition to a more sustainable economy. Market studies (see e.g. PwC, ) show that over the last two years, the private equity market has made progress in the integration of environmental, social and governance (ESG) factors in the investment process. As the world and the global economy become more complex, private equity managers and their portfolio companies are increasingly faced with ESG issues such as data privacy and cyber security, human and labor rights violations in the supply chains and with tighter regulation of carbon emissions and non-financial reporting. As demonstrated at our second ESG Round Table that took place on May 23rd in Rotterdam, these issues are increasingly being considered by private equity managers. While most of them have not yet taken any action (PwC, 2016), others have taken the lead. We can cite examples of both in our ESG engagement universe. Based on our assessment of ESG efforts made by private equity managers that are part of our ESG engagement program, we can also report that ESG integration has continued to improve. Not everybody moves at the same pace, however. Some European newcomers in the ESG program received very high scores on their first assessment, while the progress made by other managers in our older programs is still disappointing. Sometimes we also have to conclude that a particular manager s situation has changed so much that continuing the engagement as regards ESG integration is either no longer possible or will produce little or no result. For example, they may no longer be raising any funds, their partnerships have fallen apart or all their efforts are focused on exiting the remaining portfolio companies. Another positive development over the last year was that the private equity managers that take part in our ESG program increasingly reported on the environmental impact of their portfolio companies. In addition to the fact that some managers consider this to be part of their investment proposition, this trend might also be explained by the increased interest of institutional investors in the environmental (and social) impact of their portfolios, the anticipated regulation of climate change-related risks or simply the addition of a USP during the fundraising process. This report is structured as follows. In Section 2 we briefly discuss the most relevant developments occurring last year in private equity ESG integration. Section 3 is devoted to the assessment results of managers in our ESG engagement program in We also include some tips on how to build a successful ESG program and thus improve the ESG performance. Section 4 covers a case study on the development of a successful ESG program at Pegasus Capital Advisors. In Section 5, we summarize the analysis of ESG alerts and incidents associated with portfolio companies in Impact measurement and reporting are covered in Section 6, while Section 7 focuses on the issue of carbon footprints and supply chain risk management. Finally, in Section 8, we conclude with some thoughts on the future. 1 ESG Engagement Report

8 Robeco Private Equity 2 RECENT ESG DEVELOPMENTS 8 ESG Engagement Report 2016

9 What has 2016 brought with respect to ESG integration? Based on the latest PwC market survey, Are we nearly there yet? Private equity and the responsible investment journey, in which 111 general partners (GPs) from 22 countries participated, we can conclude that a large majority of private equity managers (83%) now have a policy in place related to responsible investment and that this is expected to soon become the market norm. This positive development can partly be attributed to the work of (the Private Equity Work stream) of the Principles for Responsible Investment (PRI). The number of the PRI signatories among private equity investment managers and asset owners has increased further in 2016 (see Figure 1), with most newcomers still coming from Europe and North America. Now that the PRI is providing the signatories with the assessment score cards for their ESG activities, we expect that more and more of private equity (PE) managers will publish their results (and ratings), particularly if these are very positive. That might place additional pressure on peers whose efforts are lagging. Figure 1: Number of PRI signatories investing in private equity (PE), The PRI PE Work stream has worked on the ESG aspects of legal documents that will be summarized in the Guidance on ESG provisions in fund terms (to be published in July 2017) and is starting a new project which will result in the Private Equity Reporting and Monitoring Guidance in In cooperation with the Institutional Investors Group on Climate Change (IIGCC), the PRI PE Work stream also published A Guide On Climate Change for Private Equity Investors in It is aimed at institutional investors who are limited partners (LPs) in PE funds and PE fund GPs that manage such funds. The guide explains how the policy background is set to change in response to the Paris Agreement (COP21) and the way in which climate policies are beginning to emerge in individual countries. Regulations such as Article 173 of the French Act on energy transition will have a noticeable impact on PE firms and their portfolio companies (see Section 6). The IIGCC-PRI Guide also explains how to measure carbon emissions in PE investment, how to engage with parties across the investment supply chain to reduce risks associated with carbon assets and how to look for low carbon investment opportunities. In 2016, PE industry associations also helped raise ESG standards further for their members. Invest Europe launched the ESG Due Diligence Questionnaire for Private Equity Investors and their Portfolio Companies which consists of an extensive range of questions concerning environmental impact, social policies, such as health and safety, and governance issues. The questionnaire can help investors assess a portfolio company s progress on its ESG policies and reporting. It also helps identify issues that might need more detailed technical assessment, as well as opportunities to enhance value and mitigate risks. This questionnaire was developed by the members of Invest Europe (both LPs and GPs) and their advisors. The developments described in this section suggest that PE is making progress in ESG integration across the board. The results of our latest ESG assessment of PE managers which we discuss in the next section, confirm how much progress has been made, while showing we still have a way to go. Asset Owners with PE PE Investment Managers (IM) Cumulative PE IMs (right) Source: PRI See ESG Engagement Report

10 Robeco Private Equity ESG PERFORMANCE 10 ESG Engagement Report 2016

11 3.1 Overall assessment results This is the second year in a row that Robeco Private Equity has used the PRI reporting framework to assess the ESG efforts of GPs in its ESG engagement program. Sixty-six GPs were included in the 2016 assessment 4. Three of them were included in our assessment for the first time. On a scale from 0% to 100%, the respondents received an average score of 66% and a median score of 69%. While these figures show improvement over the previous year (see Table 1), both scores correspond to the same rating, namely B 5. Table 1: Descriptive statistics on ESG scores of Robeco Private Equity s ESG Engagement Program, Average 66% 59% Median 69% 64% Minimum 13% 2% Maximum 96% 96% Source: Robeco Private Equity, PRI While the maximum score was the same as in 2015, the minimum score increased from 2% to 13%. This improvement can be attributed to the fact that one PE manager s responses to the newly introduced PRI questionnaire a year ago were very cautious. The same PE manager was able to provide better and more detailed information in the 2016 questionnaire. Figure 2: Distribution of GPs according to ESG rating and market focus Source: Robeco Private Equity, PRI E D C B A A+ E D C B A A+ Leveraged Buyout Growth Capital Venture Capital Mixed Other Infrastructure If we compare the ESG scores of the PRI signatories to those of the non-signatories, we notice some differences (see Figure 3). The PRI signatories in our ESG engagement program generally scored better than non-signatories. None of the PRI signatories received a D or an E, which are the lowest ratings. Public commitment to responsible investment seems to have a positive impact on the efforts of the PE managers. We continue to encourage the GPs in our ESG program to become part of the PRI community and familiarize themselves with the tools that the PRI has developed The distribution of respondents across different rating categories (performance bands) and market focus is shown in Figure 2. In total, 26 GPs received an A- or A+-rating. In other words, we have 26 ESG leaders in our ESG engagement program. That is more than last year and also includes one newcomer to our program, which is very encouraging. The two best performing GPs in 2015 were an infrastructure fund and a leveraged buyout fund, both receiving a total score of 96%. Leveraged buyout funds still dominate the highest rating categories, followed by the growth-focused GPs. We see improvement in venture capital where the managers typically received lower scores on average. A number of venture capital firms have seen their scores improve and four of them now have an A-rating. Figure 3: ESG performance of PRI signatories and non-signatories in the ESG program in E D C B A A+ PRI signatories Non PRI signatories 4 At the end of 2016, there were 70 GPs in the Robeco Private Equity ESG engagement program. Five of them will either not raise the funds to continue or have undergone considerable organizational changes. They continue to monitor the existing portfolios but without investing additional time and effort in ESG integration. As a consequence, they were not included in the PRI Survey or in the statistics presented in this report. The GPs included in the survey have PE funds in at least one of Robeco Private Equity s programs or mandates with an ESG overlay. 5 The ratings (called performance bands in the PRI assessment methodology) correspond to total ESG scores as follows: A+:95-100%, A: 76-94%, B: 51-75%, C: 26-50%, D: 1-25%, E: 0% Source: Robeco Private Equity, PRI One of the advantages of using the PRI reporting framework for ESG assessment is that it enables us to benchmark the GPs in our ESG program together with the other GPs that have committed themselves to the PRI. ESG Engagement Report

12 Robeco Private Equity Table 2 shows that in the Strategy & Policy module of the questionnaire, the GPs in our program slightly underperformed the other PRI signatories, while their scores for the Private Equity module were pretty similar to those of the other signatories. Table 2: ESG performance of GPs in Robeco Private Equity s ESG program compared to all PRI PE managers and all PRI signatories Strategy & Policy Private Equity Strategy & Policy Private Equity All signatories, median 80% 67% 73% 64% All PRI GPs, median 61% 73% 67% 64% Robeco GPs, median 62% 74% 62% 67% Source: Robeco Private Equity, PRI The fact that the PE managers in our program received slightly lower scores for Strategy & Policy can be attributed to the following two factors. First, the GPs in our program were less active in collaborative organizations and initiatives during the reporting year than other PRI signatories. Second, GPs in the program did not take action in respect of as many ESG investment risks and opportunities arising from the longterm trends such as resource scarcity or climate change (see Figure 6). If we take a closer look at the distribution of ESG ratings from our respondents and compare it to that of the broader universe of the PE managers endorsing the PRI, we notice considerable similarity between the two (see Figure 4). The difference lies in the tails: more GPs in our ESG program received a D-rating and fewer were given an A+. How can we explain this? There are a number of venture capital managers in our ESG engagement program with a D-rating. Venture capital traditionally underperforms compared to buyout and it is not as well-represented in the PRI universe. Alternatively, the difference might be explained by the fact that we focus on smaller managers while the PRI signatories with the highest ratings are probably the larger PE firms. Figure 4: ESG performance of GPs in Robeco Private Equity s ESG program compared to all PRI PE signatories in % 35% 30% 25% 20% 15% 10% 5% 0% PRI PE GPs Source: Robeco Private Equity, PRI E D C B A A+ E D C B A A+ Robeco PE ESG program 3.2 Insights acquired from the annual survey In addition to the ESG scores, the responses to the annual ESG questionnaire led to a number of additional insights that shed light on different aspects of ESG integration by the PE managers in our engagement program. We discuss some of them in the rest of this section Responsible investment policy The majority (91%) of GPs participating in our annual assessment have an investment policy in place which incorporates their responsible investment approach. This represents an increase over the previous year when the figure was 87%. Still, these statistics do not mean that every manager has a detailed responsible investment or ESG policy document in place. When developing an ESG or responsible investment policy, PE managers mostly refer to the UN Global Compact Principles and the UN Guiding Principles on Business and Human Rights. Figure 5 shows which other norms are used by the managers and to what extent. It suggests that the human rights-focused guidelines have been replaced by some other norms in 2016 while still remaining highly important for policy development. Fourteen GPs had not used any specific norms when developing their responsible investment approach. 12 ESG Engagement Report 2016

13 Figure 5: International norms GPs use in developing a responsible investment policy, UN Global Compact Principles UN Guiding Principles on Business and Human Rights Universal Declaration of Human Rights OECD Guidelines for Multinational Enterprises United Nations Convention Against Corruption International Labour Organization Conventions International Bill of Human Rights The main objectives reported by the GPs related to improving communication of ESG activities within the organization and ESG integration into the investment decision-making processes. Most of the GPs were still working on implementing their ESG programs, so it is not surprising that improving portfolio performance through examination of ESG factors is also a high priority. Many material ESG factors are identified based on the long-term trends that present either risks or opportunities for the portfolio companies. Figure 6 shows which long-term trends the GPs in our program most commonly respond to. Figure 6: Long-term ESG trends that GPs most frequently act on, Source: Robeco Private Equity, PRI Technology developments When we examined how the respondents disclosed their responsible investment policy we noticed the following. Twenty-one (or about 32%) of the GPs make this policy available to the public. Three of them do not yet make their policy publicly available, but are considering doing so in the future. Six managers (9%) only make their responsible investment policy available to their investors or other stakeholders upon request Managing ESG incidents Most GPs (86%) indicated that they have a process in place to identify and manage incidents that occur at portfolio companies. We are pleased with this result, as incidents could pose a reputational risk for a portfolio company, a GP, and, potentially, the investors. While the GPs in our ESG engagement program have not informed us directly of any incidents taking place at the portfolio companies, we are aware that according to RepRisk, a number of portfolio companies have been exposed to ESG-related incidents. GPs that do not have a process in place to identify and manage incidents often rely on the ability of portfolio companies to address ESG issues internally and escalate to the board level if issues are serious enough to be of material importance Responsible investment objectives PE managers typically define a set of ESG objectives as part of the implementation of their ESG policy or program. The frequency with which the GPs set and review objectives varies considerably. About half of the GPs in our ESG engagement program set and review their ESG objectives annually, whereas 26% do so on an ad-hoc basis. Four percent of the managers reviewed objectives less often than annually or not at all. This percentage has decreased in the last year. Changing demographics Resource scarcity Climate change None of the above Source: Robeco Private Equity, PRI The majority of the respondents (82%) were aware of the consequences of new technologies for their companies and act on investment risks and opportunities that arise as a result. Changing demographics, scarce resources and climate change were also high on the respondents agendas. Similar to the PwC survey (2016), our results show that GPs increasingly consider climate change. Its importance in the last year has increased further. There is still one GP left that does not take into account any investment risks or opportunities arising from the long term trends (last year there were two) Responsible investment in placement documents About two thirds of the GPs in our ESG engagement universe have in some way included responsible investment aspects in their most recent fund placement documents (PPMs or similar). Just over one third of the GPs always make formal commitments to responsible investment in their fund formation contracts, LPAs or side letters (see Table 3) ESG Engagement Report

14 Robeco Private Equity Table 3: Participating GPs formal commitments to responsible investment in fund documentation Figure 7: The importance of ESG issues in investment selection processes, We always make formal commitments to responsible investment in fund formation contracts, LPAs or side letters 36% 33% In a majority of cases we make formal commitments to responsible investment in fund formation contracts, LPAs or side letters 9% 9% In a minority of cases we make formal commitments to responsible investment in fund formation contracts, LPAs or side letters 33% 33% We do not make formal commitments to responsible investment in fund formation contracts, LPAs or side letters 22% 25% Source: Robeco Private Equity, PRI There is still a lot of ground to gain in this respect, as more than onefifth of the GPs still don t make any formal commitments to responsible investment in legal documents and one-third only do so in a minority of cases ESG in the investment process A majority of the GPs (95%) take ESG issues into account when selecting investments during due-diligence. The way GPs incorporate ESG issues into their due diligence process varies. Some GPs use the services of a consultant or other external advisors, while others conduct an extensive internal ESG questionnaire, and still others just flag ESG issues in their screening process. GPs that do not take ESG issues into account in the selection of investments provided different rationales for their behavior: some were planning to incorporate it into their processes in the future, while others believed it was unnecessary to do so because of the specific sectors they invest in. The latter suggests a rather narrow definition of ESG risks or opportunities. All GPs described how ESG issues impacted their private equity investment selection processes during the reporting year. Only five GPs did not track the potential impact of ESG issues in the investment selection process. All other 61 GPs took the ESG issues into account in the selection process (see Figure 7) with different results. ESG issues helped identify risks ESG issues helped identify opportunities for value creation ESG issues led to the abandonment of potential investments ESG issues were considered but did not have an impact on the investment selection process We do not track this potential impact Source: Robeco Private Equity, PRI 0% 5% 10% 15% 20% 25% 30% 35% 40% In the process of structuring a deal, 68% of the GPs always encourage potential investee companies to make improvements with regard to their management of ESG issues. Most GPs that do not yet encourage investee companies to make improvements plan to do so in the future. GPs that do encourage their portfolio companies to make ESG improvements often take due diligence as a starting point or initiate the dialogue with a portfolio company based on an annual ESG reporting cycle. Over the last year, the number of PE managers in our ESG program who consider ESG issues in the process of structuring a deal has increased to 58 (88%). These managers feel that ESG issues have an impact on the investment in terms of the price and/or on the shareholder/purchase agreements and/or lending covenants ESG monitoring and reporting The number of GPs who monitored whether their portfolio companies had the relevant sustainability policies in place increased further in In our ESG program, 74% of the GPs now monitor this for at least part of their portfolio. Nineteen GPs monitored sustainability in more than 90% of their portfolio companies, compared to 16 in However, an ESG program can only be effective if the entire portfolio is monitored. A GP s ESG objectives and due diligence results will most likely determine which investment will receive the most attention. One possible application of the ESG data that is gathered as part of the monitoring of portfolio companies is that it can be compared with their financial performance. Most of the PE managers in our ESG universe (59%) do not measure how their ESG efforts affect the financial and ESG performance of their portfolio. Currently, only 12% of GPs assess this impact. To gather additional empirical evidence on the relationship 14 ESG Engagement Report 2016

15 between the ESG approach and financial performance, we encourage GPs to monitor this relationship across their portfolio. Table 4: ESG disclosure by GPs in Robeco Private Equity s ESG program in Disclosed publicly 14% 8% Disclosed to investors/clients 62% 65% Not disclosed 24% 27% Source: Robeco Private Equity, PRI And how much information on the ESG efforts of portfolio companies do PE managers pass on to their investors or the public? The majority of GPs in our ESG universe prefer not to disclose ESG information regarding their portfolio to the public (see Table 4). This is not unusual for private equity as an asset class. However, in the last year, there was an increase in the percentage of GPs that publicly disclose ESG information. The amount of detail in the information provided varies a lot, but it is encouraging that an increasing number of GPs are disclosing more granular, and sometimes very detailed information on the environmental and social impact of their portfolio companies. We discuss this development in Section 7. Tips for successful ESG Integration We have seen many successful ESG programs result from our engagement with GPs in relation to ESG matters and through our involvement in different investor initiatives. Here are several tips (for the GPs) for setting up an ESG program that will be useful to portfolio companies and help them meet the LPs requirements. Formalize your ESG approach (e.g. in a policy document). Designate someone at your firm who will be responsible for the implementation and coordination of the ESG program and its implementation at portfolio companies. Include information on your ESG/RI approach in your PPMs and LPAs. Engage with your LPs regarding what they need and expect from you in terms of SG reporting. Make use of the existing tools such as the PRI s LP ESG DDQ, Invest Europe s ESG DDQ for portfolio companies and SASB sector materiality studies, etc. Monitor environmental, social and governance matters/indicators that are of material importance for your portfolio companies business and ensure they are included in their regular reporting. Endorse and support the most relevant investor initiatives in order to learn from peers and LPs and engage with them. Educate/train and involve your transaction/deal team in what they need to know to incorporate ESG matters into their activities. Use case studies to convince colleagues and get the buy-in from the management of portfolio companies. Start with the low-hanging fruit that gets visible results within a relatively short period of time (e.g. introduce energy efficiency measures that reduce costs). Include ESG information and updates in your regular reports to investors. Organize learning sessions/meetings for your portfolio companies to exchange knowledge of and experience with different ESG issues and how to address them. ESG Engagement Report

16 Robeco Private Equity 4 CASE STUDY PEGASUS CAPITAL ADVISORS 16 ESG Engagement Report 2016

17 ESG Engagement Report

18 Robeco Private Equity CASE STUDY PEGASUS CAPITAL ADVISORS Founded in 1996, Pegasus is a private, alternative asset management firm with approximately USD 1.9 billion in assets under management across four private equity funds, mainly focused on North America. Pegasus primarily makes control investments in middle-market companies and seeks to create value and impact by leveraging its operational expertise and deep industry knowledge. Pegasus has recognized the need for solutions to climate change and health and wellness and has increasingly focused on sustainable industries with positive environmental and social impacts. This is demonstrated in the firm s increasing exposure to the sustainability and wellness sectors in Funds II, III, IV and V. The performance of investments with robust ESG and/or positive impact features led Pegasus to invest 100% of its most recent fund based on these approaches. Pegasus believes that sustainability and wellness naturally complement each other, which ultimately enhances the value of the firm s focus on the sector. Within these themes, the firm focuses on the following: water, food, energy, waste and recycling, living spaces, microbiomes, fitness, sleep and the mind-body connection, and other sub-themes. Robeco Private Equity initiated the dialogue on ESG integration with Pegasus in 2011 when Fund V was added to our ESG engagement program. The manager was deemed an ESG laggard in the first assessment we performed in At the time, Pegasus had no formal ESG framework in place, but was integrating ESG best practices on a deal-by-deal basis, as the firm saw fit. For instance, investments in industrial companies typically involved more extensive due diligence and ongoing reporting on environmental, health and safety issues. The firm had expressed plans to formalize its ESG policy and to start disclosing information on ESG, particularly given its positive experiences with integration thus far, as well as the wealth of research and evidence supporting more formalized integration that has emerged in the investment industry. Over the subsequent years, we encouraged Pegasus to: appoint an ESG manager, more formally incorporate ESG themes into its due diligence and ownership practices, engage with portfolio companies to set up ESG action plans and formulate KPIs to measure progress and report on achievements. In 2014, the firm launched an ESG Leadership Plan to serve as a guiding aspirational document, forming the a foundation for more formalized ESG integration. This plan was published on the Pegasus website and reaffirmed Pegasus commitment to ESG. In 2015, the firm then held a series of internal strategy discussions to build on the plan and to secure additional specialist support for ESG integration. Pegasus also launched an impact measurement initiative to assess the ESG progress of its portfolio companies. All Fund V companies now have staff with ESG-related assigned roles and responsibilities, and certain ESG metrics and KPIs and/or reporting systems were identified to be further developed into a quarterly and annual reporting framework for Pegasus. Pegasus decided to develop an ESG Management System (ESG-MS), with the Equator Principles, Sustainability Accounting Standards Board (SASB), Impact Reporting & Investment Standards (IRIS), Global Reporting Initiative (GRI), and the United Nations Sustainable Development Goals (SDGs) as guiding frameworks. The goals of the ESG-MS are to provide a more comprehensive framework for 18 ESG Engagement Report 2016

19 CASE STUDY PEGASUS CAPITAL ADVISORS Pegasus to enhance its positive environmental and social impacts, as well as to mitigate or avoid potential negative impacts of its investments, while maintaining good governance structures that benefit Pegasus investors in the long-term. To this end, the ESG-MS provides guidance, policies and procedures at the portfolio management level, to be applied throughout the investment cycle. In order to develop and manage the ESG-MS, Pegasus launched an ESG Working Group comprised of ESG specialists and professionals from across the firm, as well as a Sustainability Committee with senior management to oversee it. The ESG-MS was then developed by the ESG Working Group throughout 2016 and was approved for implementation by the Sustainability Committee in early It includes an updated ESG Policy, which summarizes the ESG-MS and is published on the Pegasus website. In following, Pegasus launched internal training on the ESG-MS and is working on publishing its first public sustainability/esg/impact report. Pegasus 2016 Report is expected to include each company s 2016 ESG and impact performance highlights, as well as notable lessons learned and a summary of more formalized metrics and KPIs identified as goals for 2017 reporting. In terms of methodology, for the 2016 Sustainability/ESG/ Impact Report, the firm asked each of its Fund V companies to identify the top two or three SDGs with which they identify, as well as ESG and impact highlights and opportunities. Five companies specifically identified with SDG 13: Climate Action. Furthermore, SDG 7: Affordable & Clean Energy, SDG 11: Sustainable Cities & Communities and SDG 14: Life Below Water were other specific environmentally-focused SDGs that were identified by various companies in the portfolio. Each Fund V company is identifying more specific indicators to track their progress in respect of these goals. Because each company is different and has varying material ESG issues, Pegasus is working with each one to decide which metrics and KPIs should be company-specific, as opposed to being applied across the portfolio. For the 2016 report, company-specific climate change data was collected, such as: Lighting Science s annual sales of over 10 million LED lights, which reduced energy use by over 9 million MWh. ReCommunity s recycling operations resulted in GHG emissions being reduced by approximately 5.8 million MT landfill space by approximately 2.8 million cubic yards, and wastewater in landfill space by approximately 19 million gallons. Six Senses has set goals for the year 2020 to reduce GHG emissions and energy consumption by 20% and water consumption by 30%, and to increase gray water/rainwater use and reduce waste generation by 40% in resort operations. Fund V portfolio-level environmental metrics under consideration for 2017 reporting include energy (e.g. GRI on energy consumption and on energy conservation), GHG emissions (e.g. GRI on direct scope 1 GHG emissions, on energy indirect scope 2 GHG emissions, on reduction of GHG emissions), waste (e.g. GRI on waste by type and disposal method and on significant spills), and water (e.g. GRI on water withdrawal by source and on water recycled and reused). The efforts that Pegasus has put into building its ESG program have been acknowledged and the manager was awarded an A-rating in our latest ESG assessment. In a relatively short period Pegasus has transformed itself from an ESG laggard into an ESG leader in our ESG engagement program. ESG Engagement Report

20 Robeco Private Equity 5 ANALYSIS OF ESG ALERTS AND INCIDENTS 20 ESG Engagement Report 2016

21 Robeco Private Equity uses RepRisk for monitoring the reputational risk of the portfolio companies in the PE funds that are included in our ESG engagement program. RepRisk sends alerts when a company on our watch list has been mentioned in international media in relation to environmental, social or governance incidents or issues. RepRisk quantifies a company s exposure to reputational risk in an indicator called the RepRisk Index (RRI) 6. When we receive an alert from RepRisk, we first check whether the alert and the company mentioned in the article are part of the engagement universe and analyze what role the company in question had in the specific event. Next, we evaluate the following aspects of each news item: Was the case an accident or the result of negligence? Was it a one-off event or a recurring pattern of similar events? Was senior management involved in any way? Will the event have any major or minor impact on financial performance, operations or reputation? The vast majority of portfolio companies in our ESG universe were not involved in any ESG incidents in Of the 1069 portfolio companies, 991 (92.7%) had a current RRI value of zero (see Figure 8). That means they had no exposure to reputational risk due to ESG related issues. Of these 991 companies, 934 (87.4%) also had a peak RRI of zero, which indicates that they have not been involved in any recorded negative ESG events since RepRisk started searching. Seventy-six (7.1%) companies had an RRI value of between 1 and 25, which suggests low reputational ESG risks, and two companies had an RRI value that indicated medium reputational ESG risk exposure. Figure 8: Distribution of portfolio companies across different current RRI ranges in 2015 and % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: RepRisk, Robeco Private Equity Having a positive RRI value does not automatically mean that a company itself has been involved in an ESG-related incident that could damage its reputation. A positive RRI value could, for example, be the result of an article or report that is related to the sector in which the company is active. Sometimes a competitor has been involved in an incident and the article suggests that the same issues could occur in a portfolio company from our universe. That is why we analyze and evaluate the articles and assess the involvement of individual portfolio companies. Compared to 2015, the distribution of portfolio companies across different current (and peak) RRI ranges has remained more or less constant (see Figure 8). Upon closer examination of the incidents in question, we notice that for some fund managers, multiple companies have been mentioned in relation to possible exposure to ESG reputational risk, while for most portfolio companies (and fund managers), an alert has never been issued. Some sectors are simply more vulnerable to ESG risks, such as food production, fashion and retail. Food producers, for example, are susceptible to contamination in either their own production facilities or in their supply chains. Product recalls by these companies are typically widely publicized and even more so, if they focus on organic products. Companies active in the fashion or retail industry are susceptible to social risks in the supply chain. In addition to the sector, the size of a company and the involvement of celebrities seem to increase the probability of getting bad press. 6 RRI captures and quantifies a company s exposure to ESG issues. Its calculation is based on the influence of news sources, frequency and timing of ESG risk incidents, as well as the news content, i.e. severity (harshness) and novelty (newness) of the issues addressed. RepRisk identifies the following four categories of RRI: : low exposure (to reputational risk) : medium exposure : high exposure : very high exposure ESG Engagement Report

22 Robeco Private Equity Figure 9 shows the distribution of news items related to portfolio companies in the ESG engagement program across (RepRisk-defined) sectors since January All sectors which were mentioned in less than 1% of the news stories since 2007 have been included in the category called Other sectors. The sector that is most often mentioned in news items in our portfolio is retail, followed by financial services and personal and household goods. In total, 1050 news items/articles have been included in Figure 9. Figure 9: Distribution of ESG news items with portfolio companies in ESG program across different sectors since January 2007 Retail Financial Services Personal and Household Goods Alternative Energy Gambling Construction and Materials Travel and Leisure Software and Computer Services Food and Beverage Industrial Goods and Services Banks Oil and Gas Industrial Transportation Media Chemicals Insurance Health Care Equipment and Services Other sectors 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% If we zoom in on the most common ESG issues in the retail sector we find that they are related to the supply chains or violations of national legislation (see Figure 9). Poor employment conditions and human rights abuses are also noted relatively often in news stories related to the companies in the retail sector. Financial services companies most often deal with violations of national legislation, followed by fraud and a negative impact on communities. An example of such an issue could be a financial institution that invests in gas explorations which reportedly led to earthquakes in a specific region. The Other issues category is relatively large for financial services and includes corruption and bribery issues, among others. Most news items regarding the personal and household goods sector published since 2007 related to the companies being accused of committing or being complicit in human rights violations and health and environmental issues associated with their products. As illustrated in Figure 10, 21.2% of the 1050 news stories on companies in our ESG universe were related to retail, 12.0% to financial services and 10.6% to personal and household goods sector Of all news items, 4.6% were linked to the supply chain issues in the retail sector and 2.5% to the violation of national legislation, while 3.1% related to violation of national legislation in the financial service sector and 1.8% to fraud. Of all articles in the personal and household goods sector, 1.6% related to a product or service posing a risk to the consumer s health or the environment and 1.4% to human rights abuses in this sector. Source: RepRisk, Robeco Private Equity Figure 10: Distribution of ESG news items with portfolio companies in ESG program across different sectors since January 2007 Personal and Household Goods (PHG) Financial Services (FS) Retail (R) 0% 5% 10% 15% 20% Forced labor (PHG 0.6%; FS 0.2%; R 1.1%) Occupational health and safety issues (PHG 0.7%; FS 0.3%; R 1.2%) Products (health and environmental issues) (PHG 1.6%; FS 0.1%; R 1.3%) Animal mistreatment (PHG 0.1%; FS 0.1%; R 1.5%) Human rights abuses and corporate complicity (PHG 1.4%; FS 0.8%; R 1.7%) Poor employment conditions (PHG 1%; FS 0.2%; R 2.1%) Violation of national legislation (PHG 0.9%; FS 3.1%; R 2.5%) Supply chain issues (PHG 1%; FS 0.3%; R 4.6%) Other issues (PHG 1.1%; FS 3.1%; R 0.0%) Fraud (PHG 0.1%; FS 1.8%; R 0.3%) Discrimination in employment (PHG 0.1%; FS 0.2%; R 0.5%) Misleading communication (PHG 0.7%; FS 0.3%; R 0.5%) Freedom of association and collective bargaining (PHG 0.5%; FS 0.0%; R 0.6%) Impacts on ecosystems/landscapes (PHG 0.1%; FS 0.4%; R 0.6%) Impacts on communities (PHG 0.2%; FS 1.0%; R 0.7%) Child labor (PHG 0.7%; FS 0.2%; R 0.8%) Source: RepRisk, Robeco Private Equity 22 ESG Engagement Report 2016

23 In 2016 we analyzed 26 news items that we considered relevant and potentially had an impact on the financial performance of portfolio companies. After additional analysis we contacted PE managers in eight cases. Four of those incidents were related to social issues, three incidents to governance issues and one to an environmental issue. We were not informed directly by the managers of ESG issues or incidents at the portfolio companies in any of these cases. This suggests that PE managers probably apply a different definition of material events when they decide whether or not to inform their investors of ESG incidents at their portfolio companies. The following are examples of news items which have led to us contacting the GP to request more (specific) information: A portfolio company faced a class action lawsuit due to allegations of systematic underpayment of overtime compensation and of its employees being unable to take meal breaks. The GP that is invested in the company informed us that the class action was initiated by one ex-employee. The company was not aware that he/she was disgruntled during his/her time with the company as they have specific policies in place regarding employee rights such as meal breaks and expense reimbursement. In response to this claim, the company has reviewed its policies. Another article referred to criminal proceedings against former senior management-members of a financial institution who were arrested prior to GP s investment. The GP was fully aware of these developments when performing its due diligence on the company. Its due diligence included the comprehensive anti-money laundering, sanctions and anti-corruption screening. The corporate governance has been completely overhauled under the GP s ownership and included the appointment of a new supervisory board and a new senior leadership team, among others. While the report raised serious issues, it was directed at the sector as a whole, not an individual portfolio company. Therefore, no specific action was taken in relation to a particular company. An article reported that there were multiple hacks into all kinds of social media sites resulting in the login credentials of millions of customers being stolen. One of our portfolio companies was also mentioned in the article. However, it turned out not to have been a victim of the hack. Therefore, we have decided not to contact the PE manager in question. The above descriptions illustrate the wide variety of ESG alerts that can be associated with portfolio companies. Some of them require further action, others don t. The analysis of ESG alerts in this section suggests that the exposure of portfolio companies in our ESG engagement program to reputational risk due to structural ESG issues was limited. The fact that we have not been directly informed by the PE managers of any ESG incidents occurring at the underlying companies also confirms this. On the other hand, the PE managers might be applying a different definition of materiality when they decide whether or not to inform their investors on the ESG incidents at their portfolio companies. While we are happy to see that most of the portfolio companies have never been mentioned in news articles in relation to ESG incidents, we realize that RepRisk has a limited reach and is not able to keep track of everything, in particular with regard to small(er) companies. The following are cases in which we did not contact the PE manager in question after conducting our analysis of an ESG alert: A food producing company has recalled specific products due to possible contamination. The recalls were done pro-actively by the company itself, before the food inspection got involved or illnesses associated with the consumption were reported. Thanks to this measure, no customers became ill from consuming the products. We were of the opinion that the company handled the incidents as best it could. In addition, the company have reimbursed the customers for the recalled products. An international NGO published a report in which it accused companies in the fashion industry of failing to protect refugees who work in their supply chain in Turkey. The NGO surveyed companies and concluded that most brands have not done enough to prevent the exploitation of Syrian refugees. The report highlighted issues such as poverty wages, child labor and sexual abuse affecting undocumented Syrian refugees. ESG Engagement Report

24 Robeco Private Equity 6 CARBON EMISSIONS & SUPPLY CHAIN RISKS 24 ESG Engagement Report 2016

25 Our analysis of the ESG incidents at the portfolio companies (see previous section) clearly shows that the PE managers need to ensure that their portfolio companies have properly managed human rights risks in supply chains. According to the abovementioned PwC survey (2016), human rights, carbon footprinting and climate risks are already high on the agenda of PE managers. To raise awareness and share knowledge on these relevant issues we devoted our second ESG roundtable to the importance of dealing with decarbonization and the supply chain issues. On 23 May, the roundtable of 15 private equity specialists and sustainability professionals discussed how (PE) portfolios can be decarbonized and how to set up a framework for dealing with human rights issues. These discussions are summarized below. Judging by the number of collective and individual investor initiatives and the increasing regulation, there appears to be a growing interest in climate issues in the financial sector. Examples include the PRI Montreal Pledge, the Task Force on Climate-Related Financial Disclosure and the French Energy Transition Law. Following the adoption of the Paris Agreement on Climate Change at the end of 2015, an increasing number of asset owners dedicated their portfolios either fully or partially to lowcarbon investments. A good example is the UK s Environment Agency Pension Fund: with a view to expanding these investments, 15% of the portfolio was already devoted to low-carbon climate change-mitigating opportunities. In terms of regulation, France has taken a particularly high profile role in establishing progressive reporting on energy transition and climate change efforts. According to RobecoSAM sector specialists, there are four ways to approach decarbonization as an investor: through divestment, monitoring, optimization and engagement. Of these methods, divesting the high-carbon companies is not a complete solution, since nothing really changes apart from the ownership of the assets. Instead, RobecoSAM advocates careful monitoring in order to measure the environmental impact of a portfolio, optimization by reducing carbon footprints without compromising financial performance and upholding Robeco s longheld belief in the power of engaging with companies to encourage improvement. Better information on carbon emissions is crucial in order to gain a clearer understanding of future physical and financial risks and to ensure a smoother transition to a low(er)-carbon economy. PAI Partners is one of the first PE managers to have assessed the carbon impact of their portfolio companies. The firm has been closely involved in the Initiative Carbone 2020 (ic20) which united competing PE firms in France in efforts to develop the methodology to assess the carbon footprint and decarbonize companies. The supporters of ic20 have made public, concrete and measurable commitments to: Measure the direct and indirect carbon footprint (scopes 1, 2 and 3) of portfolios, using an accessible and effective estimation methodology Integrate climate issues in the investment process by 2016, in order to gradually expand a climate strategy to include all the portfolio companies and Publish the consolidated carbon footprint of the portfolio by The ic20 action plan includes the assessment of carbon impact issues in the investment process, raising the investment team s awareness, and training, portfolio carbon footprint measurement and the carbon footprint measurement of the GP as a firm. In the wake of the ic20 launch, PAI Partners conducted a full portfolio climate impact project in 2016, focusing on major sources of emissions for each company in the portfolio. Their objective was to anticipate and adapt the future climate risks and opportunities faced by their portfolio companies. PAI Partners have developed their own methodology that will help them fulfil their commitments and comply with the new regulations. As a result, they will be able to inform their investors about the climate risks and opportunities within their portfolio and lead their portfolio companies toward a lowcarbon economy. The ESG roundtable held in Rotterdam also dealt with the importance of carefully monitoring supply chains to ensure they are sustainable. ERM, the world s largest dedicated sustainability consultancy, pointed out that high-profile incidents such as the collapse of the Rana Plaza factory in Bangladesh in 2013 can lead to face tremendous reputational damage for the affected companies, not to mention disruptions in supply and huge compensation claims that directly impact the bottom line. ESG Engagement Report

26 Robeco Private Equity PE-held companies are not immune to human rights incidences leading to value erosion in their own operations and supply chains. Poor governance, corruption, inadequate audits and factory or cheating on social (e.g. safety) audits, acceptance of poor conditions and failure to report and monitor sub-contracting are practices that could also be observed at the portfolio companies of PE funds worldwide. Understanding suppliers and the contexts in which they work plays a vital part in assessing and analyzing human rights and other supply chain risks. According to ERM, the new model to achieve the sustainability of supply chains includes the following elements: 1. Robust auditing and monitoring 2. Supporting capacity building and monitoring improvement; 3. Strengthening audits & capacity building with industry collaboration; 4. Improving buying practices, order timing and rewarding vendor improvement 5. Building long-term partnerships with the suppliers. The business risks associated with human rights are growing, as are the opportunities. Since the introduction of the UN Guiding Principles for Business & Human Rights (the Principles) in 2011, businesses are increasingly expected to take responsibility for human rights. The Principles state that companies should avoid causing or contributing to adverse human rights impacts, prevent or mitigate adverse human rights impacts in the supply chain and demonstrate respect. According to the Principles, companies should take the following steps: 1. Have up-to-date policies 2. Assess risks related to the suppliers 3. Engage with the suppliers and stakeholders 4. Provide grievance mechanisms and remediate 5. Report on their activities 7 ERM sees increasing numbers of hard and soft human rights laws. These days, most new regulations are based on the Principles, which are progressively being incorporated into other guidelines (e.g. OECD Guidelines, Equator Principles), national action plans, and legislation (e.g. the UK Modern Slavery Act, French human rights vigilance law, the EU Non-Financial Reporting Directive 8 ). Stakeholders believe that companies must go further, as well as down or up the value chain to mitigate adverse human rights impacts. Companies are expected to perform human rights due diligence and examine their direct and indirect impact on human rights. Some PE firms and their portfolio companies already act in line with the new model to achieve the sustainability of supply chains, presented by ERM. A good example discussed at the roundtable involved one of 21 Investimenti s portfolio companies. The company, active in the production of Southern Italian wines, has started a specific long term program to educate local small grape producers in the supply chain to run their vineyards in a profitable way. A team of agronomists and enologists educated local farmers to produce top quality grapes and to supervise all steps of the production process (planting, pruning, irrigation, fertilization and harvesting) to improve the quality and quantity produced and control production costs. This long-term procurement program has helped to build a successful, export-oriented company with a strong positive footprint in the local communities. The roundtable provided some insights into how PE managers can assess carbon emissions and manage the supply chains of their portfolio companies. The French ic20 initiative and open discussions are a good demonstration of how the PE community is willing to work together to uphold shared values of sustainability. 7 For example, the UK Modern Slavery Act 2015 requires businesses with global turnover of 36m or more to report annually on steps taken to ensure that slavery and human trafficking are not taking place in either its business or its supply chains. 8 This 2016 directive forces large public-interest entities with more than 500 employees to disclose relevant and useful information on the policies, main risks and outcomes related to the environment, social and employee matters, human rights, anti-corruption and anti-bribery in their management report. 26 ESG Engagement Report 2016

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28 Robeco Private Equity 7 IMPACT MEASUREMENT AND SUSTAINABLE DEVELOPMENT GOALS 28 ESG Engagement Report 2016

29 The French and other initiatives discussed in the previous section can have a positive impact on sustainable development. A growing number of institutions, including PE managers, are now using the UN Sustainable Development Goals (SDGs) as a framework for reporting on the impact. Within our ESG engagement universe the clean tech and resource efficiency-focused managers, in particular, are heading in this direction, and to a lesser degree, the sector-agnostic, buyout funds. In the PwC s latest Global PE Responsible Investment Survey (2016) 84% of the respondents said that SDGs were relevant to their business and many recognized that aligning their investment practices with them offered benefits, including for their reputation. However, most GPs are still highly uncertain about how to translate the SDGs into investment practices and outcomes. A total of 94% of PE firms participating in the PwC survey said they didn t have the tools available to them to assess the progress they had made on the SDGs yet. Table 5 shows an attempt to link the indicators that PE managers currently use to express the environmental impact of their portfolio companies to the relevant SDGs. Table 5: Examples of environmental impact indicators and the related SDGs from the GPs in Robeco PE s ESG program (Impact) Indicator Value in last reported year SDG Fund 1 Tons of carbon (CO2) offset 19,399,395 7, 12 Billions of kwh equivalent of energy saved 14, Fund 2 Energy saved (toe) 19, Water saved (million m3) , 12 Materials saved (tons) 264, CO2 emissions reduced (in tons of CO2 equivalent) 266,531 13, 15 Air cleaned (km3) Pollutants avoided (tons) 44, Water cleaned (millions of m3) 6,307 6, 7 Fund 3 Green jobs created 8,000 8 Fund 4 Millions of metric tons of GHG emissions avoided Metric tons of CO2 emissions reduced: reduced emissions of GHG, incl. CO2, CH4, N2O and chlorofluorocarbons (CFCs) , ,000 12, 13 Tons of landfill avoided , 15 Millions of liters of petrol saved 7 12 Kgs of combustion gases avoided (NOx, SOx, CO, TOG) Metric tons in material savings (water, biological, or minerals) 5,000, , Energy savings & production in terajoules 2,680 7, 12 Tropical hardwood conserved in cubic meters 1, Fund 5 Renewable capacity (MW) installed this year 80 7, 13 Fund 6 Renewable energy (GWh) produced this year 312 7, 13 CO2 tons saved thanks to installations 700 7, 13 MW nameplate capacity of the renewable energy projects in the fund 25 7, 13 MWhs of green power produced per annum 46,000 7, 13 Source: Robeco Private Equity and reports by PE managers in its ESG program A closer look at the indicators in the second column reveals that there is currently no consensus as to how environmental impact should be reported. CO2 emissions abated/reduced is probably the most commonly used indicator. The other indicators stem from the specific focus of the portfolio companies in the different funds. In terms of the contribution to specific SDGs (see column four) we can conclude that most portfolios contribute to SDG 7 and SDG 12, which are related to sustainable energy and sustainable consumption and production patterns (see also Table 6). This is not surprising given the focus on clean tech and resource efficiency of the funds included in this overview. ESG Engagement Report

30 Robeco Private Equity Table 6: UN Sustainable Development Goals (SDGs) SDG 1 End poverty in all its forms everywhere SDG 2 End hunger, achieve food security and improved nutrition and promote sustainable agriculture SDG 3 Ensure healthy lives and promote well-being for all at all ages SDG 4 Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all SDG 5 Achieve gender equality and empower all women and girls SDG 6 Ensure availability and sustainable management of water and sanitation for all SDG 7 Ensure access to affordable, reliable, sustainable and modern energy for all SDG 8 Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all SDG 9 Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation SDG 10 Reduce inequality within and among countries SDG 11 Make cities and human settlements inclusive, safe, resilient and sustainable SDG 12 Ensure sustainable consumption and production patterns SDG 13 Take urgent action to combat climate change and its impacts SDG 14 Conserve and sustainably use the oceans, seas and marine resources for sustainable development SDG 15 Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss SDG 16 Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels SDG 17 Strengthen the means of implementation and revitalize the Global Partnership for Sustainable Development Source: UN SDG ( And what conclusion can we draw from the examples from Table 5 on the possibilities to report on the environmental or social impact of portfolio companies across (the portfolios of) PE funds? First of all, data on quantified impact is very limited. Secondly, the absolute numbers do not say much about the actual impact of portfolio companies: this can be big, small, marginal etc. Thirdly, company- or fund-specific indicators used by GPs make it nearly impossible to aggregate impact across the portfolio. In addition, there is a question of attribution of impact as investors can only claim impact in proportion to their stake in a specific company or fund. All in all, there are many issues which have yet to be resolved. Despite the issues and limitations, Ambienta, Alpina and other GPs in our engagement program have shown that it is to some extent possible to quantify the impact of the portfolio companies and make it more tangible. We expect the number of GPs measuring and reporting on their impact to continue to increase in the future. 30 ESG Engagement Report 2016

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