How do you encourage GPs to integrate ESG into the investment process?
The most important tool we have is our method of evaluating ESG in fund due diligence. We hold semi-structured interviews with the GP aligned with the Principles for Responsible Investment LP due diligence questionnaire. We look at the integration of ESG into the investment process, the ownership phase and reporting. In each of the modules we have subcategories that we score against our own scorecard to calculate the total ESG score for the GP.
We evaluate the team rather than looking at individual sustainability topics in a portfolio, assessing ESG-related beliefs, policy ambitions and processes. The results are part of the decision material that goes to our investment committee and our board of directors. If the GP lacks commitment or understanding of ESG, that’s a risk and is often linked to other governance factors.
If we decide to commit capital, we continue using this evaluation model on an annual basis. It provides a baseline from where we can compare results both for the GP and our portfolio average over time.
When you are assessing the investment team, what are you looking for?
Which issues they focus on, how they evaluate what’s material, how they use it in their decision process, what’s its impact. We try to keep this discussion concrete, including recent cases where issues came up. During the ownership period, we look at how GPs support portfolio companies, increase knowledge and share best practice, but also if the GP uses standardised guidance or a template or tools. We also examine how they report to investors and a broader set of stakeholders and to the public.
AP6 BY NUMBERS
AUM: SKr32 billion ($3.5 billion; €3.1 billion)
Allocation to unlisted assets: 100 percent (52 percent direct investments; 48 percent fund investments)
GP relationships include: AlpInvest, Bridgepoint, Carlyle, Cinven, Creandum, CVC, EQT Partners, Nordic Capital, Permira.
Direct investments include: Castellum; Salcomp; eRT; Anticimex
Are there particular topic areas that you are more concerned about?
We invest across sectors in buyout and venture and in teams of a variety of sizes, strategies and geographies. Irrespective of size, geography and strategy, it’s more important for us that they have the right ESG ambition and relevant processes in place. But then we do have two focus areas that we always cover both in diligence and monitoring: these are climate change and diversity and inclusion. These span the portfolio and we believe the industry should work systematically to improve in these areas.
As one LP among many in a fund, how do you ensure your ESG needs are taken into account?
Using our evaluation method, we realised that we had access to lots of really interesting information. We started to feed anonymous data back to our GPs and they were really interested in what other GPs were doing because there was so little information out there. Many LPs send out questionnaires and GPs said they respond but then they don’t hear anything more. We’ve created a virtuous cycle of feedback and improvement through a dialogue. We have managers’ attention because we can give something back.
So you’re an influencer?
We don’t have all the answers but we have some observations and insights. We do set targets – it’s not that everything we do is totally qualitative. But we can have most influence through dialogue rather than just asking for information and reporting. For instance, we invited our Nordic GPs to a roundtable in 2016 to discuss where we were in terms of gender diversity, the challenges and what to do about them. Then we had a follow up meeting this November to discuss concrete measures and their impact. Everyone is really interested in this topic and attended, not just with their presence but by sharing their experiences. Being able to facilitate those kind of discussions is a way we have impact. GPs also see the possibility for our practical support. It works both ways.