ESG investment policy best practice in the private equity sector:
What does good look like?
By Mamedupi Matsipa, Ata Capital CEO
16 July 2021 – The value of a capital investment is no longer just about creating profitable returns for shareholders.
There is an increasing number of investors that are intentionally looking at how their capital investments can be used to generate positive and measurable social or environmental benefits alongside financial returns for companies.
Responsible investments – which take environment, social and governance (ESG) principles into consideration – are a way for private equity managers to create positive and lasting impact, and drive transformation and change within portfolio companies, while at the same time benefitting society at large.
The ‘do no harm’ principle and beyond
While most private equity managers undertake investments on the premise of adding value to the companies in which they invest, they should not only consider ways to improve their portfolio company’s ESG or “green” credentials, but also ensure that their investments reduce harm in the long-term.
Including ESG principles into your investment strategy is the first important step in ensuring that your investments do as little harm as possible or reduce harm in the long-term. With ESG rapidly becoming the new normal, an important next step is the mobilisation of private equity with the strategic intent to make a measurable contribution to building a better and more sustainable future for all.
One way is for ESG policies to broaden their focus in order to encapsulate broader societal objectives is by including relevant company or industry specific guidelines, regulations and legislation, including South Africa’s transformation and empowerment targets.
Pushing the boundary beyond compliance
Navigating ESG compliance and performance requirements can be tough for portfolio companies and is a long-term journey. While private equity managers can provide companies with the right tools and frameworks required to improve ESG compliance, they can further enhance performance in a number of ways.
Private equity managers can be more intentional throughout the process by driving compliance, change and transformation; being actively engaged in the inner workings of the company and having a seat at the table to drive strategic initiatives.
In doing so, private equity managers are able to hold themselves accountable for driving improved ESG performance within portfolio companies.
To push the boundary beyond mere ESG compliance and to ensure that the portfolio company is able to achieve meaningful and lasting change, private equity managers must become the driving force behind leveraging ESG principles to bring about impactful change within the business.
Equally as important as implementing ESG performance targets within a portfolio company, is tracking the progress and measuring ESG compliance against a portfolio company’s ESG targets.
Tracking and measuring of ESG impact can be difficult. While some ESG principles are quantitative in nature and easier to measure, others may be more qualitative in nature, and more difficult to measure.
As a result, it is important to set clear performance indicators right from the start, as this will assist in monitoring and measuring compliance and allow one to course correct when necessary.
In learning and gaining insight into the broader impact of their investment, private equity managers could start to track and measure the true impact and success of their investment by judging success on aspects beyond just financial returns.
Sustainable, value-driven business investments in a post Covid-19 era
While the Covid-19 pandemic has brought to light the urgent need for companies to be able to operate in a sustainable economy and deliver products and services that have the lowest impact on the environment and society, it has also brought to light the need to build back better post-Covid.
In South Africa, which already faces a number of social challenges, the pandemic has placed further attention on the need to address social issues such as inequality, human rights, diversity and inclusion, and transformation.
At Ata Capital, we are focused on identifying and maximising real investment opportunities that create sustained stakeholder impact, generate effective returns and drive sector transformation. We therefore actively invest in businesses that seek to add value to the African economy, whilst delivering on the continent’s transformation imperative.
As a majority black-owned, and 100% black-managed investment manager, Ata Capital has redefined its investment strategy and business mission to provide capital that grows and transforms private businesses in Africa. We recognise that having the correct ESG credentials and establishing a framework that reflects our capacity to assess, monitor, measure and manage these risks is crucial in achieving this.
ESG is becoming an integral part of our investment process, and something that we place at the forefront of our transactions, from origination of the transaction, during the due diligence process, through to monitoring and performance evaluation.
Our aim is to prove that we can drive high impact, positive change in the businesses that we invest in, while delivering on our targeted investments returns and creating shareholder and stakeholder value.
Now is the time to pause, reset and ‘rebuild’ on a more sustainable footing. As private equity investors, we can use this opportunity to support businesses that seek to add value to the economy and drive Africa’s transformation agenda.
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