Keynote Interview: Actis on taking ESG responsibility

Actis, a leading growth markets investor, has had responsible investing at its heart since inception in 2004, building on a history as the UK government’s private investment arm. From the outset, Actis has integrated environmental, social and governance (ESG) considerations into the investment decision-making process.

Shami Nissan is Head of Responsible Investment, and says: “Our exclusive focus on growth markets makes us distinct from many other investment houses. ESG issues are typically more acute in our markets and therefore can have material implications for business – we would not be fulfilling our fiduciary duty if we did not systematically consider ESG issues in our investment processes. We view any ESG shortfalls as opportunities to improve company performance, helping to build more successful, profitable and resilient businesses.

When investing in OECD countries, there are more ESG safeguards in place in terms of regulation, legislation, enforcement, voluntary codes and industry benchmarks which spell out what is permissible and what constitutes best practice. In our markets such safeguards are absent or weak, and for that reason Actis applies international ESG standards to all of its investments irrespective of the local regulatory environments”.

AT THE TOP TABLE

At Actis, the Responsible Investing team is an integral part of the investment committee process and is well placed to advise the investment committee and individual deal teams on the nature and magnitude of relevant ESG issues and to recommend appropriate next steps.

“We are fully integrated into the investment decision-making process,” says Nissan. “We look at ESG issues through a materia-lity lens, so our time, effort and resources are focused specifically on the set of ESG issues which are material to the business and have clear link to value. These vary by sector, geography and the company’s track record and capacity.”

It is not necessarily the case that portfolio company management of ESG issues is on a par with best practice international standards. Indeed if that were the case, says Nissan, “we may as well shut up shop – it is that opportunity to raise standards which is a core part of our value creation thesis.”

Rather, the key question becomes whether management has the appetite to address the issues, within an acceptable timeframe. If so, we can work with management to develop and agree ESG workstreams post-investment, and ensure we monitor progress throughout so we can demonstrate the improvements made.

TOP DOWN, BOTTOM UP

Actis takes both a top down and bottom up approach to assessing ESG risks and opportunities. So, as highlighted, company track record, capacity and commitment (bottom up) are key.

“We also apply top-down assessments, to provide a more strategic and more systematic means of assessing ESG risks in particular. By considering the inherent ESG risks to a sector and geography, and mapping this to our c. 70 portfolio companies, we can determine where our risk ‘spikes’ are, what our priorities should be, and put our mind to developing a framework which enables us to better manage and mitigate the risks in a consistent way across Actis.”

Actis invests across three asset classes and six sectors: Real Estate, Energy, and within Private Equity, consumer, financial services, healthcare and industrials. In 2015, Nissan developed a Real Estate Impact Model that mirrors a similar model Actis developed for the Energy sector in 2010. It comprises ESG metrics which can be used to measure ESG performance of investments – this enables Actis to track performance of an asset over time and pinpoint where the greatest shortfalls are. Essentially, the model measures the progress Actis makes over the lifetime of each of its real estate investments against a defined universe of ESG metrics. These include areas such as resource efficiency, health and safety, security, clear land title and community relations. Real estate also presents significant opportunity to deliver social benefits, not least through job creation in both construction and operational phases.

Mitigating risks is a primary focus, as are cost savings through more efficient use of energy and water, for example. Actis is a pioneer in developing green buildings in sub-Saharan Africa, having developed the first green-rated building in West Africa, which opened in 2015; One Airport Square. The office building in Ghana achieved a 30 percent reduction in energy use and the first LEED-certified (Leadership in Energy and Environmental Design) mall in East Africa. That project, Garden City in Nairobi, Kenya, includes Africa’s largest solar panel-covered car park, delivering much cheaper water and electricity, and 70% of construction material was sourced locally. Heritage Place, a world-class office development that Actis is soon to launch in Lagos is redefining the standards of green design and quality of office space in Nigeria.

In the healthcare sector, Nissan has led the development of a framework for assessing and managing business integrity risks. The importance of upholding the highest standards of business conduct was recently highlighted by the GlaxoSmithKline bribery case in 2013, where the UK pharmaceuticals company was hit with the largest bribery fine ever imposed on a foreign company in China.

Nissan says: “We invest in the healthcare sector across our markets, including China, and we resolved to develop a more robust way of assessing and managing business integrity risks, such as bribery and corruption, in the sector. We now have a framework that provides a systematic and consistent approach to assessing business integrity risk pre-investment, including how we structure due diligence, and post-investment, looking at the best route map for the company to get to a position of best practice.

INVESTING IN ENERGY

The Energy sector is another where Actis is at the forefront, with the current fund heavily invested in renewables businesses, including wind and solar. To date, Actis' energy investments have provided electricity to c. 65million people and built c. 14.5 GW of generating capacity, as of June 2015. In this sector, a perennial focus is community buy-in and ensuring that businesses have a social license to operate. There are a myriad of examples which highlight the business criticality of this and where failure to establish a positive dynamic with communities has led to business disruption through blockades, protests, sabotage and violence.

Many Actis energy investments are wholly owned platforms, established by Actis from the outset. “Because we handpick the team and dictate the organisational design of the platform, we ensure there is a Head of ESG at the platform, and very often I or one of my team is involved in selecting those individuals,” says Nissan. “Similarly, our energy platforms have ESG sub-committees to the Board. We recently held our first conference at which all Heads of ESG from our portfolio companies were brought physically together for the first time, offering a combined pipeline of c. 4.5GW of generation under development, in construction or operating and networks providing 3.4 million electricity connections.* It was a great opportunity to share best practice and accelerate learning. Despite operating in different environments, cultures and market regimes, commonalities were evident and robustly discussed.”

While it may be leading the charge, Actis sees ESG challenges moving up the agenda for all investors, particularly as more large buyout firms invest in emerging markets, LPs become more sophisticated in their appreciation of the issues, and the global sustainability challenges such as climate change, urbanisation, water scarcity and population growth become more acute.

Fortunately, as investor requests for ESG information get ever-more granular, Actis remains comfortably ahead of the game.

COMPANY PROFILE: ACTIS
65+ year heritage
$7bn funds under management as of September 30, 2015
200+ limited partners
c. 90 investment professionals
13 offices
c. 70 portfolio companies
27 countries
114, 444 employees in Actis portfolio companies

Actis is a leading investor in growth markets, delivering consistent competitive returns, responsibly. It has a growing portfolio of investments across Asia, Africa and Latin America and US$7bn funds under management today.

The firm invests through insights gained from trusted relationships and local knowledge, deep sector expertise and an unparalleled heritage, set within a culture of active ownership.

Applying developed market disciplines to growth markets, an established team of c. 90 investment professionals in 10 countries identify investment opportunities in response to two trends: rising domestic consumption and the need for sustained investment in infrastructure across private equity, energy and real estate asset classes.

Actis is a signatory to the United Nations Principles for Responsible Investment (UNPRI), an investor initiative developed by the UNEP FI and the UN Global Compact. Actis targets consistent superior returns across asset classes over the long-term, bringing financial and social benefits to investors, consumers and communities. It calls this the positive power of capital.

In 2015 Actis was voted ‘Private Equity Firm of the Year in Africa’ by Private Equity International (PEI), ‘African Infrastructure Fund Manager of the year’ by Infrastructure Investor and Catalyst’s ‘Deal of the Year’, awarded for the acquisition of Compuscan.

INVESTMENT HIGHLIGHTS INCLUDE:
Food Lovers Market: the largest independent food retail group in Africa ($54m, December 2015)
Sigma Pensions (“Sigma”): a leading Nigerian Pension Fund Administrator ($62m, November 2016)
Coricraft Group: one of South Africa’s leading home furnishings retailers (September 2015)
Lekela Power: a pan-African renewable energy generation platform ($1.9bn, February 2015)
Ostro Energy: an Indian renewable energy platform ($230m, February 2015)
Genesis Group (Genesis): Brazil’s largest grain testing and inspection business ($45m, December 2014)
Integrated Diagnostics Holdings (“IDH”): Egypt’s largest private sector healthcare diagnostics service provider ($113m, December 2014)
Université Centrale Group: a leading provider of private tertiary education in Tunisia ($50m, December 2014)
Tekkie Town: South Africa’s leading independent sports and lifestyle shoe retailer ($65m, November 2014)
IT’sSEG: Buy and build insurance broke-rage platform in Brazil ($100m, November 2014)
Zuma Energía: Mexican energy platform ($250 million, September 2014)
Société Nationale d’Electricité (SONEL): Cameroon’s national integrated utility ($202m, June 2014)
Credit Services Holdings (CSH): A pan-African buy-and-build credit services business ($100m, April 2014)
Upstream: the leading emerging markets mobile monetisation company (April 2014)
Symbiotec Pharmalab Limited: an Indian leading specialist producer of steroid- hormone active pharmaceutical ingredients (APIs) ($48m, October 2013)
Atlantic Energias Renovaveis S/A: a Brazi-lian renewable energy company ($169m, September 2013)

This article is sponsored by Actis. It appeared in Private Equity International's Responsible Investing Special supplement, published February 2016.