Snapshot: Actis talks ESG

Shami Nissan, head of responsible investment at Actis, a firm that specialises in emerging markets, talks to PEI about environmental, social and governance policies and value creation.

Q. Why the strong commitment to environmental, social and governance policies?

The reason Actis has strong commitment to responsible investment is the value creation angle. Our approach is a commercial one. Given we operate in emerging markets, it is critical that we consider ESG issues alongside other business issues because ESG issues are far more acute in our markets. For us the objective of financial success is intertwined with ESG issue management.

Q. What challenges have there been incorporating ESG into your fund strategies?

In the emerging markets, ESG issues can be poorly understood by company management. There can be a low level of understanding of what constitutes international best practice – the companies may simply not be exposed to that.

Another challenge is it simply takes time for some of these ESG measures to bear fruit. If you're tackling something endemic and deeply rooted such as a weak safety culture, those elements take time to mature; they're not an overnight development.

The third challenge is a misunderstanding about ESG and the misperception that it's a risk/compliance issue, rather than a lever for value creation. In reality if you look at ESG, it's about income generation, cost saving, avoidance of delays and building a more motivated staff which will help with turnover. There is a small piece of ESG that links to compliance, such as regulatory compliance regarding environmental permitting, but that's a very small part of ESG.

Q. How does Actis take ESG into account when making investments?

Actis is 10 years old. From day one we had a two-person team dedicated to ESG. That's no small feat. A large majority of PE doesn't have a team just for ESG, let alone a two-person team.

The Responsible Investment team operates across all companies, all asset classes, all geographies. We see each investment paper from the earliest screening document. We work alongside the deal team, conduct site visits, speak with company management. The RI team is genuinely plugged into the core investment decision-making process at Actis. 

By considering ESG issues through a 'value lens' we ensure that our work on ESG improvements translates to the bottom line, and therefore supports a successful exit. We assess our investments against international best practice, and build necessary ESG work-streams into the action plan.

For example, improving subpar safety standards at construction sites represents cost savings through reduced downtime, reduced injuries. Another one is securing licenses to operate thanks to effective community engagement strategies. Positive relationships, secured early, help to mitigate any subsequent grievances, which could threaten operations and business continuity. 

Q. How is the LP sentiment on ESG changing?

It's going to continue to get more important. Geographically we see a difference between a European investor and the North American one. European investors have been on the journey longer so they tend to ask more in-depth questions and take a more holistic view on ESG.

Having said that, the notable exceptions are the US large public pension funds who have had a long and strong commitment to this area. In terms of the nature of the questions, it's moving from 'do you have policies and a framework?' to 'how do you do it?' The questions are getting more insightful.