Q&A: EQT’s Andreas Aschenbrenner and Sophie Walker

Q: How did the notion of EQT Future – a longer-dated, impact-focused fund – emerge?

Andreas Aschenbrenner: We started thinking about it around the time of EQT’s IPO. We want to have a positive impact in everything we do, and when you look at ESG from an investment perspective, it is focused on not doing wrong, whereas impact is about getting a positive social outcome. To move to the next level, we needed to think what the next big strategic move could be. EQT Future is our lighthouse project, where we try to inspire the whole platform. It has several different elements. Two of the most important are tying our compensation to achieving not just financial returns but also social outcome targets, and then changing the fee model so that we only charge fees on invested capital.

Q: What makes it different from other impact funds in terms of investment mandate?

AA: It’s an impact-driven fund, not just an impact fund. There are a lot of smaller funds in the impact universe with good mission statements, but their impact is limited because they focus on businesses that are still in the growth or venture phase. We want to invest in large, market-leading companies where we can transform entire industries. Our first investment is Anticimex, a pest control company. Pest control is a huge problem for society in terms of disrupting food supply, while the use of biocides damage ecosystems. Anticimex is a market leader in using preventive pest control methods that are biocide-free. If we drive this business in the right direction, helping regulators to understand the harm caused by biocide, it’s possible we can change the industry. It’s a large investment – EUR6 billion ($6.9 billion) in enterprise value – and achieving impact will take time.

Q: How much time do you have?

AA: For EQT’s regular funds, we typically have a base case calibrated to four years. For EQT Future, we are calibrating to eight years, and I think a lot of investments will be 6-10 years. The fund life is 12+3 years, rather than 10+2 years. And the portfolio will be more concentrated, roughly 10 companies.

Q: What are the expectations for geographical deployment?

AA: For the time being, it will be 80% Europe-focused and 20% rest of world, mostly North America. That’s where we have most of our resources deployed, and we are integrated into the main platform in terms of deal sourcing. The four partners are based in Europe, although I expect that will change over time. A lot of these companies are global, so there will be a significant Asian part. There are some areas, like digitization, where Asia is more advanced than the rest of the world. The opposite is true for food additives, where Sweden adopted certain standards in the mid-1980s, and Asia doesn’t have much regulation. It will be interesting to take areas where the Nordics have been forward-leaning and roll things out in other markets where regulation will come.

Q: To what extent is there likely to be crossover with EQT’s other funds?

AA: We put our entire portfolio through the EQT Future deal selection framework, and we ended up with an overlap of four companies. In that case, the main fund has the right of first refusal. But it doesn’t change the fact we should invest in good companies. The impact threshold and what we want to achieve, the ESG selection criteria are the same. It’s just that the impact hurdle for EQT Future – supporting the three Ps, people, planet, and prosperity – is higher.

Q: How is the bar set higher?

AA: Deal selection is based on negative screening, thematic alignment, and impact potential. What we ask is: Can this company have market shaping positive impact on a large scale, and is that achievable in the timeframe we are looking at? To measure against this, we have developed a toolbox with multiple elements. The most important is the impact management framework, which has fund-level and asset-specific targets. The fund level ones follow the three Ps, and they are very measurable. On planet, it is greenhouse gas (GHG) emissions reduction, based on the Science Based Targets initiative (SBTi). On people, we try to mirror and reflect eNPS scores by improving employee wellbeing. On prosperity, we want gender diverse management teams, but not just on the executive team or non-executive team, but it covers the top 20% of earners – that is down to n-3 on the hierarchy level. These targets go across the portfolio, and we link our carry to achieving them. The asset-specific targets should cover at least one of the three Ps. For example, with Anticimex, we would say the reduction of biocides measured in kilos.

Sophie Walker: Additionally, what we are driving with EQT Future is the asset-specific impact assessment – defining it pre-acquisition and teasing it out properly to understand what impact change we can contribute through the toolbox and through our global size and scale. We nail down what the targets and KPIs should be and enact that through the impact acceleration plan. It is distinct from the rest of the platform, where we drive ESG core leadership against our standard expectations, but we are not putting in place really detailed “impact” acceleration plans for every investment. This is because it might not yet be appropriate to their scale, geography, and market transformation approach.

Q: Is it possible to reduce impact to standardized data points for benchmarking?

AA: You need to have it general enough to be benchmarked across the industry, so we chose GHG reduction, employee wellbeing, and gender diversity as portfolio-wide targets. The asset-specific targets are very precise and vary a lot by investment. For an oncology diagnostics lab, for example, we would measure how many years of quality life the investment has generated by helping diagnose cancer in the right way. It’s very easy to have lofty targets about doing something good, but we are trying to define targets so precise we can measure outcomes.

Q: What does the adoption of Science-based targets (SBTs) say about EQT’s broader ESG journey?

SW: EQT was an early mover in terms of adoption of the UN PRI, involvement in trade associations, and setting frameworks. It was also one of the first to have a sustainability team and a sustainability blueprint. We are now moving from having voluntary requirements for portfolio companies because we could see the business case of doing that to highly mandated requirements that our LPs and regulators want us to meet. That means people will be assessing performance on all manner of ESG metrics. SBT adoption is a signal of our serious intent to drive action, but also an execution challenge because we are trying to do it across many businesses simultaneously. We must persuade boards of the significance of the business case and then help them operationalize it. That means driving efficiency reductions in their scope-one and scope-two carbon emissions, as well as making more fundamental changes to their business model, supply chain engagement, or vehicle fleet, and engaging with customers on scope-three carbon emissions.

Q: Why is climate change EQT’s top priority in ESG?

SW: There is a societally material, human species survival reason behind it. At the same time, if you forecast through what that might mean from a carbon pricing perspective, consider legislation coming down the line, and how a climate-proofed business will be a future-proofed business, it makes total financial sense for us to drive hard at climate immediately. Then there’s the added benefit of it being quantifiable and easy for people to understand. There are other issues that are highly material to us as an investor. For example, on diversity, inclusion, and equality, we point to that already with the focus on gender in some of our ESG¨-linked credit facilities, and we will expand our approach to be more holistic in that area. It’s in EQT Future as well, by having that ESG-linked gender diversity management target.

Q: What does SBTi compliance mean for portfolio companies in practical terms?

SW: For EQT, outside of our own operations, our SBT target is ultimately an engagement target for portfolio companies. For our portfolio companies, we don’t have a set figure for annual emissions reduction; the intention for us is the cascade through the system. For our portfolio companies, they have two years from the point at which we buy them to set their GHG baseline, set their target, business case and implementation plan, and then submit their target for validation to the SBTi. Hopefully, several companies will go quicker than that. But it allows for a slow validation process by the SBTi, and it allows time to put in place a rigorous baseline for year one if there isn’t one in place already.

Q: EQT is among the first private markets investors to link impact KPIs to carried interest. Was it a difficult step to take?

SW: Tying sustainability to carry as we are doing with EQT Future is cutting edge, especially the link we are making to setting and executing SBTs. But of course, it is not unusual for large, listed organizations to tie sustainability to general remuneration. In my last organization, it had been integrated with core management activities for five years, and that includes D&I targets and a sustainability bonus pool. But what we are trying to do at EQT that is bold is transform the financial services and private markets industry. This involves taking learnings from organizations that have been doing it for quite a long time and then work out how to broaden them and mainstream them in private markets.

Q: Will ESG-related compensation be introduced across other strategies?

SW: It will be actively considered, and we have some specific remuneration mechanisms in place already. The EQT Future approach is important because it gives us an opportunity to learn and set the standard and think about how that might apply across the broader platform.

Q: Do you expect this to become a broader industry trend?

AA: I hope so. I think we all need to put our money where our mouth is. We are a bit of a science lab. Many of the things we are trying will be a standard in less than one or two fund generations across the EQT platform, and I expect other market participants will follow. There is enormous momentum right now. Why are we focusing on GHG emissions reductions? Because it’s important for our families and for society. But it’s also the largest opportunity out there. The ESG funding gap is $6 trillion a year, and half of that relates to climate. What we see with COP26 is governments and regulators trying to set standards, and the early adopters will be the ones who drive value. We want to do good and do well.

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• Topics
• GPs
• Cleantech
• Europe
• EQT Partners
• Asia
• Impact investment
• ESG