We are active private equity investors who partner with our portfolio company management teams to achieve growth and improve productivity. Building stronger, better companies creates value for our investment partners, the portfolio companies in which we invest, their employees, and the communities in which they operate. We believe that part of ensuring that we help build better, more productive companies is to partner with our portfolio companies on key environmental, social, and governance (ESG) issues.
Because we believe that considering these issues is critical to our long-term private equity investment success, in 2009 we became signatories of the globally recognized voluntary framework of the United Nations-backed Principles for Responsible Investment and helped lead the development of the Private Equity Growth Capital Council’s Guidelines on Responsible Investment. We have made important progress on our commitments in 2010.
Integrating ESG in the Investment Process
In recent years, we have taken steps to formally integrate and track ESG considerations, such as environmental and social impacts of business practices or stakeholder expectations, throughout our private equity investment process, with particular focus on the due diligence and stewardship phases.
Considering ESG Issues in the Pre-Investment Phase
We conduct a thorough diligence exercise before we make any private equity investment. Each potential private equity investment undergoes significant review by our industry teams as well as by industry and issue experts and a committee of our most senior executives. Relevant ESG considerations are part of this due diligence for our private equity investments. In some cases we may decide that an ESG issue poses too great a risk for an investment, for example, due to historically high levels of corruption in a country where the target company operates, or concerns with the environmental impact of a company’s key product. However, a decision not to invest is rarely exclusively due to ESG issues, because these concerns are often intertwined with other issues that may make the business less attractive for investment. We increasingly see that there can also be potential for creating value through a focus on ESG issues, for example, through measures that reduce costs, improve risk management and enhance competitiveness. In 2011, we will continue to focus our attention on integrating ESG considerations in our diligence efforts, including by providing for private equity investment professionals and by implementing a diligence team that assesses every potential investment specifically for ESG risks or opportunities.
Partnering with the Portfolio on ESG Issues During Stewardship
From initial investment to the point of realizing value, companies are usually part of our private equity portfolio for an average of five to seven years, depending on our investment thesis and market conditions. This longer time horizon often allows our portfolio companies to invest the time, resources, and attention needed to grow the company and provides a unique opportunity for us to partner with our portfolio companies to enhance their management of ESG issues.
In 2010, three areas of progress are particularly noteworthy: environmental performance, employee engagement, and responsible sourcing.