2013 PE ESG SURVEY ENVIRONMENTAL SOCIAL GOVERNANCE. European firms are far ahead of the U.S. in adopting ESG programs. PAGE 6

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1 Sponsored by: European firms are far ahead of the U.S. in adopting ESG programs. PAGE 6 LPs care more about ESG issues than ever before. PAGE 13 What factors drive ESG efforts at the firm level? PAGE 7 KKR and Doughty Hanson named ESG leaders in. PAGE 15 PE ESG SURVEY ENVIRONMENTAL SOCIAL GOVERNANCE

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3 Table of Contents Introduction Participant Statistics ESG Programs at PE Firms ESG at Portfolio Companies The LP Point of View Industry Leaders Credits & Contact PitchBook Data, Inc. John Gabbert - Founder, CEO Adley Bowden - Research Director Content James Gelfer - Editor Allen Wagner - Senior Writer Design Allen Wagner - Senior Writer Jennifer Sam - Graphic Designer RR Donnelley is the world s largest integrated communications company. The company works collaboratively with more than 6, customers worldwide to develop custom communications solutions that reduce costs, drive top-line growth, enhance ROI and increase compliance. Drawing on a range of proprietary and commercially available digital and conventional technologies deployed across four continents, the company employs a suite of leading Internet based capabilities and other resources to provide pre-media, printing, logistics and business process outsourcing services to clients in virtually every private and public sector. Our Corporate Responsibility Report is available at Our Venue secure online workspace provides a powerful feature-set and an intuitive design that allows you to easily organize, manage, share and track all of your sensitive information. Venue data rooms provide complete control, allowing you to manage who has access to your data room, which documents they see, and how they can interact with those documents. Venue data rooms are backed by RR Donnelley, a $1.2 billion corporation with approximately 5 operating locations, with operations in North, Latin, Europe and Asia, and more than 55, employees worldwide. RR Donnelley s total revenues are larger than all other virtual data room providers combined. Whether you re conducting due diligence for a merger, raising capital, or developing a document repository, a Venue virtual data room is the ideal virtual workspace for managing critical information. RR Donnelley is the sponsor of the PitchBook Private Equity ESG Survey. All information contained in this publication is for informational purposes only and should not be construed as legal, accounting, tax, or other professional advice of any kind, on any subject matter. RR Donnelley expressly disclaims all liability in respect to actions taken or not taken based on any or all the content herein. Data Analysis Peter Fogel - Senior Data Analyst Contributor Kirk Hourdajian - Sustainable Business Solutions, PwC Contact PitchBook Research - research@pitchbook.com Editorial - editorial@pitchbook.com Sales - sales@pitchbook.com COPYRIGHT by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment. WE VE GOT IT COVERED PITCHBOOK FOR LIMITED PARTNERS: No one offers more coverage of the private equity and venture capital landscape. Identify top-performing GPs Find out more by ing Conduct better due diligence demo@pitchbook.com or Track industry trends visiting pitchbook.com and more! Private Equity ESG Survey 3

4 Introduction When we conducted our inaugural environmental, social and governance (ESG) survey of private equity (PE) professionals last year, it was startling to see that nearly half (49%) of our general partner (GP) respondents did not have an ESG program at their firm and had no plans to create one, despite heightened concern from limited partners (LPs) on ESG issues. What a difference a year makes not to mention the fact that we had a higher proportion of European respondents this year, who are much more progressive when it comes to ESG issues. In our second edition of the ESG survey, a majority of GP respondents () now work at a firm with an established ESG program and another 26% either have an ESG program in development or plan to create one in the near future. However, there are still some PE firms that see little value in ESG programs. As one GP respondent put it: we think [ESG] is the most asinine initiative ever to come out in the business world. While some PE firms eschew ESG issues and think that strong fund performance is enough to attract LP commitments, the LPs themselves are telling a different story. Eighty-four percent of LP respondents say that ESG issues are at least somewhat important when deciding whether or not to commit to a PE fund, with 18% claiming they are essential. Furthermore, 24% said they would they would commit to a fund with slightly lower historical performance if the firm had a strong ESG program. Remember, many of the largest contributors to PE funds are public pension plans, endowments, foundations and sovereign wealth funds institutions which not only are interested in returns but also have an image to maintain. GPs have to be more aware of investors desire for knowledge of their investments beyond just the financial return, commented one LP respondent, while adding that the responsibility ultimately falls on the investors: GPs will only change if the LPs push them to. One of the big takeaways from this year s survey is that more PE firms are taking the necessary steps to make ESG a fundamental part of their investment approach. For example, 28% of GP respondents indicated that their firm produces a corporate social responsibility (CSR) report, up from 18% in. And while finding effective metrics to monitor ESG performance continues to be the largest hurdle for ESG efforts, PE firms continue to find new ways to measure their ESG initiatives and have increasingly utilized forums, case studies and industry events and guidelines to fill the knowledge gap. We hope that this survey serves as a lens into the current state of ESG issues in the PE industry and provides a starting point for developing a set of best practices that can be adopted by firms of all sizes. If you are interested in participating in future editions of the survey, or have any comments or suggestions for how we can improve this report, please contact us at research@pitchbook.com. What is ESG? Environmental: waste, water, electricity, transportation fuel, toxic chemicals, paper Social: diversity, human rights, supply chain, employee engagement Governance: policy, management structure, board-level oversight CSR: Corporate Social Responsibility EDF: Environmental Defense Fund GIIRS: Global Impact Investing Rating System PEGCC: Private Equity Growth Capital Council PRI: Principles for Responsible Investment ILPA: Institutional Limited Partners Association Private Equity ESG Survey 4

5 Participant Statistics # of GP Respondents # of LP Respondents Our GP respondents showed a much higher level of ESG awareness than they did last year, which is to be expected with the increased focus on ESG issues exhibited by LPs, industry organizations and governmental bodies. But a bigger factor is that there was a much higher proportion of European respondents in this year s survey. As will become evident throughout this report, European investors place a much greater importance on ESG issues than investors from other regions Number of GP Respondents by AUM Number of LP Respondents by AUM <$5M $5M-$1B $1B-$5B >$5B N/A <$5B $5B-$25B $25B-$1B >$1B N/A Private Equity ESG Survey 5

6 ESG Programs at PE Firms PE firms show an increased focus on ESG issues in 13 GP Q1: Does your firm have an ESG management program? North Europe Yes No; it is currently in development No; but we have plans to create one No The topic of ESG in PE has received increased attention from the media and investors over the last year, and PE firms have responded. In our survey, nearly half (49%) of GP respondents came from firms that had no ESG program and no plans to create one. Now, just 14% of GPs fall into that category, with nearly two-thirds () of respondents this year indicating that their firm has already established an ESG program. In addition, 26% of respondents hail from a firm that is currently developing an ESG program or planning to create one in the near future. But as the charts above reveal, much of the rise in ESG consciousness in this year s survey stems from our higher rate of European respondents, who tend to be more ESG savvy. More than three-quarters (78%) of European GPs have an established ESG program, compared to just half of North n GPs. As to be expected, the ESG programs of our GP respondents are more developed than in last year s survey; the percentage of firms with ESG programs that are at least two years old ballooned from 27% in to 49% this year. But the main takeaway from the graph on the upper right is the steep drop in the percentage of firms that do not have any sort of ESG initiatives from 53% in to only 25% in. GP Q2: When did your firm start actively implementing ESG initiatives? Even with substantially more PE firms having ESG programs in than, the proportion of respondents that plan to increase their attention to ESG issues in the future still grew from 55% in to 89% this year. With more and more LPs pushing GPs on ESG issues, as we will explore on page 13, this certainly seems to be the logical move for PE firms in an increasingly competitive fundraising environment. GP Q3: Do you plan to increase your attention to ESG issues in the future? North Europe More than 5 years ago 2-5 years ago 1-2 years ago Less than 1 year ago Do not have ESG initiatives Yes No Private Equity ESG Survey 6

7 Why are PE firms paying more attention to ESG? GP Q4: What factors drive your ESG efforts? (multiple choices permitted) 8 74% 71% 73% 69% 7 64% 63% 55% 5 45% 42% 42% 39% 4 36% 37% 34% 31% 29% 29% 3 24% 24% % 11% Environ. & social consciousness LPs Risk mgmt Brand/ image Corporate Portfolio governance companies Given the fact that PE firms are concerned with the profitability of their investments first and foremost, it seems somewhat odd that environmental and social consciousness continues to rank significantly higher than cost management and operational efficiency as a driver of ESG programs. It would appear that PE firms are not as incessantly focused on the bottomline as they are typically characterized or perhaps respondents are simply more inclined to display high-minded ideals when being surveyed. One factor directly related to the success of PE investments that did rank highly was risk management, with 64% of GP respondents citing it as a contributor to their ESG efforts, up from 55% in. This is corroborated by the fact that ESG issues are considered most frequently during the due diligence process. Unsurprisingly, LPs continued to be a top driver of ESG programs at PE firms, although the proportion of GP respondents that identified LPs as being a factor in their ESG efforts dropped slightly from 74% in to 69% in. With LPs being such an important motivator for PE firms, and our GP respondent base being fairly attuned to ESG issues, it is somewhat odd to see that ESG issues are only taken into consideration by 76% of PE firms during the fundraising process. Gov t regulation Employee interests Cost mgmt Operational Competitors efficiency It s important that ESG management is integrated with the overall management of any business and not treated as a separate or somehow less important activity driven only by external demands. -Philip Rowland, Senior Operating Partner at TDR Capital LLP GP Q5: When do you consider ESG issues? (multiple answers permitted) Fundraising Due diligence Holding period Exit Private Equity ESG Survey 7

8 What needs to be included in an ESG program? GP Q6: How important are the following factors when developing an ESG program? Monitoring the success of ESG initiatives Developing an ESG mgmt program at the firm level Using industry guidelines Engaging outside ESG experts Outlining ESG philosophy in LP agreement Requiring portfolio co s to develop a CSR report Hiring in-house ESG professionals Essential Very important Important Somewhat important Unimportant In last year s survey, GPs indicated that developing an ESG management program at the firm level was the most important factor when developing an ESG program. While GPs saw this as even more crucial in this year s survey, monitoring the success of ESG initiatives overtook it as the most important factor of an ESG program, which makes sense with the high priority that GPs place on metrics of all stripes. But despite this development, finding effective metrics to monitor ESG progress continues to be the biggest challenge for PE firms. For firms that need guidance in this regard, a rundown of some of the most popular systems and resources currently available for gauging the ESG performance can be found on page 12. Amazingly, only 19% of GP respondents found it to be very important or essential to outline their ESG philosophy in limited partnership agreements, despite 76% of firms claiming to consider ESG issues during fundraising. If a PE firm is going to invest the time and resources into an ESG program, why wouldn t they want to make those efforts explicit to their investors? Cost was identified as the biggest challenge to ESG efforts by roughly one in five GP respondents in but cited by just 7% of respondents this year. Several factors likely led to this decrease, such as more readily available resources to assist in ESG efforts and the fact that ESG programs can actually lead to cost savings. Many GPs expressed the desire for industry groups to provide more guidance and standardized benchmarks for ESG metrics, which should lead to higher prioritization of ESG issues by both GPs and LPs. GP Q7: What is the biggest challenge for ESG programs and initiatives? 7% 38% 7% 5% 7% 9% 43% 42% 18% 24% Effective metrics to monitor performance Implementation Cost Employee participation Other Private Equity ESG Survey 8

9 How to share your firm s ESG story GP Q8: Does your firm produce a corporate social responsibility (CSR) report? North The CSR report not only articulates a firm s ESG program to outside parties, but also underscores the importance the firm places on ESG issues and highlights successes to people within the firm. The percentage of PE firms with a CSR report a hallmark of a well-established and mature ESG program expanded from 18% in to 28% in. In the future, more PE firms will likely allocate the resources necessary to produce the CSR report as their ESG programs become more mature. Examples of CSR Reports All PE firms will take a different approach when it comes to crafting the CSR report. Some produce it as a standalone publication while others incorporate it with their annual review. Here are some examples of how the top PE firms share their ESG stories: KKR: ESG and Citizenship Report Carlyle: Corporate Citizenship Europe CalPERS (LP): Towards Sustainable Investment Yes No Creating the CSR Report Who The audience for a PE firm s CSR report will obviously vary depending on the firm s size and level of public visibility, but the most crucial audience for all PE firms will no doubt be LPs. For firms that put in the effort to develop an ESG program, it is imperative to clearly articulate what the program is accomplishing to both current and potential investors. The CSR report is the ideal format for this and should include everything from high-level ESG philosophies to specifics on how ESG performance is measured and how it impacts the firm s investments. What The actual content of the CSR report will vary from firm to firm, but there needs to be substance. PE firms that include quantitative results in their CSR report differentiate themselves from those that simply have nice photos. Key details all firms should consider in their CSR report include: Objectives of the ESG program General approach to ESG issues How ESG performance is measured Updates on specific ESG initiatives at both portfolio companies and the firm itself When and Where Most firms produce a CSR report on an annual basis, but LPs appreciate a high level of communication from their GPs. As such, it would also be wise to include ESG updates in quarterly reports. Making the CSR report easily accessibly online allows potential future investors, acquisition targets, media outlets and other interested parties to see the firm s commitment to ESG issues. Private Equity ESG Survey 9

10 Staying current with ESG developments ESG Groups & Programs PRI: Developed by a group of international institutional investors in conjunction with the United Nations, the PRI is a set of six principles that guide the investment decisions for more than 1, signatories. PEGCC Guidelines for Responsible Investment: PEGCC, the main lobbying group for the PE industry, developed its Guidelines for Responsible Investment through a collaboration with institutional investors around the world and the PRI. The Guidelines serve as a starting point for PE firms that are developing ESG programs. ILPA Private Equity Principles: Endorsed by more than 24 investors, the ILPA s Private Equity Principles provide a blueprint for GPs and LPs to align their ESG efforts. ESG Disclosure Framework: Over the course of 16 months, a group that included 2 PE associations, 1 prominent GPs and dozens of LPs from 11 countries came together to create the ESG Disclosure Framework. Published earlier this year, the document is centered around ESG disclosures in PE investments, outlining five objectives relating to fund due diligence and three pertaining to disclosures during the life of the fund. PEI Responsible Investment Forum: The forum, which is co-hosted by the PRI, informs PE firms on ESG strategies that can be employed to develop better portfolio companies. GP Q9: How do you stay abreast of developments in ESG? (multiple answers permitted) Forums, case studies & industry events Industry guidelines Independent research Outside consultants In-house experts We don t GP Q1 & LP Q1: Which ESG-related groups or programs do you belong to, endorse or participate with? (select all that apply) % 5 35% 3 33% GPs LPs UN PRI ILPA PE Principles 2% PEGCC Responsible Investment Guidelines 16% 4% Environmental Defense Fund 12% Global Reporting Initiative 7% Business for Social Responsibility 14% 15% Other 16% None Private Equity ESG Survey 1

11 ESG at Portfolio Companies GPs see ESG becoming more critical in operations GP Q11: How important are ESG issues when exiting a company via? Corporate acquisition Secondary buyout IPO Essential Very important Important Somewhat important Unimportant PE firms have changed their tune in the last year when it comes to utilizing ESG initiatives at their portfolio companies. Thirty-one percent of GP respondents this year said that ESG issues were essential or very important when looking to improve portfolio company operations, compared to just 18% in. European GPs were much more inclined to find ESG issues to be an important factor in portfolio company operations, with 86% saying they were at least important. With the scrutiny that comes with being a public company, GP respondents found ESG issues to be significantly more important for companies being exited via IPO as opposed to a sale to corporate acquirer or another PE firm. ESG issues were found to be least important when selling to another PE firm, which was somewhat surprising given the relatively high level of ESG focus and awareness indicated from respondents throughout our survey particularly when performing due diligence. Much of the effort around ESG programs centers around initiatives that can cut costs, improve efficiency and enhance the operations of the portfolio company, but philanthropic and volunteer programs are an GP Q12: How important are ESG issues when implementing operational improvements at a portfolio company? GP Q13: Do you have philanthropic and/or employee volunteer programs at your portfolio companies? North Europe Essential Very important Important Somewhat important Unimportant Yes; they are required Yes; they are encouraged but not required ideal way to engage employees from across the organization. To that end, more than half (52%) of GP respondents encourage these types of initiatives at portfolio companies but hardly any (2%) make them a requirement. No Private Equity ESG Survey 11

12 How do GPs monitor ESG at portfolio companies? GP Q14: Do you require portfolio companies to use a systems approach to manage environmental performance? Our next initiative around awareness is bringing our portfolio companies together to share best practices in ESG, discuss the issues and opportunities and re-confirm our expectations for management of this area. GP Q15: Do you require portfolio companies to develop a CSR report? North Europe Yes; ISO certification required Yes; other type of certification No -Philip Rowland, Senior Operating Partner at TDR Capital LLP Yes No; but currently working towards it No Commonly used ESG rating systems International Organization for Standardization (ISO) Recognized as an international leader in voluntary standards systems, ISO standards address a vast array of ESG issues, including energy and environmental management and social responsibility. ISO develops its standards through a consensus process that draws on experts and industry professionals from around the globe. The organization has published more than 19,5 International Standards since its inception in Global Impact Investing Rating System (GIIRS) Initiated as a project by B Lab, an independent non-profit organization, GIIRS assesses the social and environmental impact of both funds and individual companies. GIIRS utilizes third-party documentation and ratings methodologies developed by an independent Standards Board. One of the biggest advantages to using a thirdparty system is that it addresses the diverse nature of companies and funds by evaluating them on a range of criteria pertaining to specific industries, impact areas and investor preferences. Impact Reporting and Investment Standards (IRIS) Developed by the Global Impact Investing Network (GIIN), IRIS is a catalog that offers standardized metrics that can be employed to measure social, environmental and financial performance. Some of the specific variables that IRIS can help quantify include: governance, social policies, employee training, greenhouse gas emissions and biodiversity. North Europe Private Equity ESG Survey 12

13 The LP Point of View LPs care more about ESG issues than ever before LP Q2: How important are ESG issues when evaluating a GP and deciding to commit to a fund? GP Q16: How important are ESG issues when drafting limited partnership agreements? 1 8 Essential Very important 1 8 Essential Very important 4 Important 4 Important 2 Somewhat important 2 Somewhat important North Europe Unimportant North Europe Unimportant As was the case in, LPs continue to indicate a high level of concern regarding ESG issues. The results largely mirror those from last year, but the LPs that were simply interested in ESG issues last year are beginning to view them as essential. Nearly one in five (18%) LP respondents reported that ESG issues were essential when evaluating GPs while last year not a LP Q3: How has your focus on ESG issues changed in the last three years? 1 single LP fell into this category. European LPs, like their GP counterparts, are particularly concerned with ESG; every European LP respondent said that ESG issues were at least important when committing to a fund. GPs are more attuned to the ESG concerns of LPs than they were last year, but there is still room for improvement, with 27% of GP respondents saying GP Q17: Have LPs expressed increased concern about ESG issues in the last three years? 1 8 Increased Stayed the same Decreased 4 2 Yes No North Europe Private Equity ESG Survey 13

14 LP Q4: How do you expect your focus on ESG issues to change in the future? 1 LP Q5: Why does ESG matter in your investment decisions? (multiple choices permitted) Risk management North Europe Increase Stayed the same Decrease Brand/image Environmental/social consciousness Corporate governance Government regulation Employee interests Competitors Other It doesn t that ESG issues are unimportant when drafting limited partnership agreements. Sixty-two percent of LP respondents say that their focus on ESG issues has increased in the last three years, with just one respondent saying that they are less concerned with ESG issues than in the past. GPs appear to be getting the message loud and clear. In, only half of GP respondents said that LPs had expressed increased concern over ESG issues, but that surged to 77% in this year s survey. Even though LPs have shown significantly more attention to ESG issues in recent years, of LP LP Q6: What areas are you most concerned about when it comes to ESG? (limit three) respondents said they will continue to increase their focus in the future. This should only serve to motivate GPs to build out their ESG programs even faster. Environmental and social consciousness ranks highly among LPs as a motivator to address ESG issues, but they are also concerned with the risk profile of their investment and their brand and image. Corporate governance, business integrity, and environmental health and safety were the main concerns of LPs when it came to specific ESG issues. Interestingly, European were much more inclined to care about social issues, which was their second highest concern. LP Q7: Would you rather commit to a GP with no ESG program but top quartile performance or a GP with a strong ESG program and slightly lower performance? Corporate governance 1 Business integrity Environmental health & safety Social issues 8 ESG program & lower performance Climate change Resource preservation Other 4 2 No ESG program & higher performance None 2 4 Source: 8 PitchBook 1 Private Equity ESG Survey 14

15 Industry Leaders As part of this year s survey, PitchBook asked respondents to name some of the firms they viewed as leaders in ESG practices. It was encouraging to see firms of all different sizes and from both sides of the Atlantic be named, but there were two clear industry leaders : KKR and Doughty Hanson. KKR was the most frequently named leader in ESG practices in both this and last year s survey, which is no surprise considering the firm initiated its Green Portfolio Program in 28 and maintains an ongoing partnership with the Environmental Defense Fund. Doughty Hanson, a London-based European private equity firm, wasn t mentioned in last year s survey, but was cited as a leader by several firms and LPs this year. Here s a look at what makes each firm so respected among their peers when it comes to ESG issues: KKR was the firm most frequently named as a leader in ESG practices for the second year in a row. The firm launched its Green Portfolio Program in 28 to generate operational improvements at its portfolio companies. The program was created in partnership with the Environmental Defense Fund and focuses its efforts on reducing emissions, electricity usage and other environmentally focused operational improvements. KKR estimates that through its first five years the program has generated $917 million in cost savings and additional revenue. According to KKR, 25 companies have participated and avoided more than 1.8 million metric tons of GHG emissions since the program s inception. Also included on the Green Portfolio Program website are numerous case studies and statistics that show the impact of the firm s ESG programs. For example, KKR portfolio company Oriental Brewery, which installed a modified boiler system and optimized the fermentation processes in-house, reported that from 28 to 21, the company avoided $17.7 million in energy costs and 19 million cubic meters of water consumption. KKR also operates initiatives at its portfolio companies to improve transparency, employee health and sourcing practices and supply-chain risks. Doughty Hanson has been active in ESG issues and practices for several years and became the first PE signatory to the PRI in June 27. The London-based PE firm was also one of the first to produce an ESGfocused report, partnering with the World Wildlife Fund in 211 for Private Equity and Responsible Investment. On its website, the firm includes a list of ESG policy items it seeks to achieve, a case study for one of its portfolio companies, details on its own carbon neutrality efforts, and information on social investment and charitable efforts. As was the case for many of the GP respondents to our survey, Doughty Hanson sees undertaking ESG issues not as a burden, but as a way for the firm and its portfolio companies to enhance value, elevate the brand and reduce risks associated with poor governance. According to the firm, the projects it undertakes are: commercially driven and are designed to mitigate the financial and reputational risks to which Doughty Hanson, our portfolio companies and our investors are exposed. They also create additional opportunities to increase the value of our portfolio companies, enhance their brands and better position them for exit. Private Equity ESG Survey 15

16 PitchBook Bet ter Data. Bet ter Decisions. PitchBook for Private Equity Firms pitchbook.com INTELLIGENCE IN ACTION No one offers more insight on the private equity landscape than PITCHBOOK FOR PE FIRMS What will you do with it? Source & filter investment opportunities Monitor peer activity & industry trends Identify the right LPs for your next fund Benchmark your fund performance Run public & private comparables Augment portfolio executive teams