VIDEO: Doughty Hanson's Adam Black

"They are also much more sophisticated in their approach to asking certain questions of us, and wanting to see tangible evidence that we have not just written a policy on ESG but actually implemented and got something from it," Black says.

While compliance - essentially minimizing the risk of getting involved with companies that might expose the GP and its investors to reputational or legal risk - is one side of the ESG story, then the other is using ESG criteria to enhance portfolio companies. Black is a team of one, but he is able to drawn upon the expertise from a network of industry consultants and companies in Doughty Hanson's portfolio.

"You will find real experts in the companies we own on topics related to ESG. Finding those people, engaging with them and building a rapport or trust is critical," he says. "Then it is making sure you leverage those skills across the fund. If we have experienced ESG issues before with a particular company by virtue of building a new facility in, say, Mexico we can put those people in touch with others who are looking to build a facility in a similar place."

When a private equity firm is preparing to make an investment, time and access are two of the principal challenges ESG practitioners face. Black rarely has the luxury of visiting each of a target company's suppliers and deal teams are often under pressure to get transactions done. As result, much of the initial thought process must be distilled into a few questions intended to get sense of how a company views ESG.

While ESG concerns generally do not prevent deals happening, failure to address issues during the holding period can come back to haunt a GP on exit. "It is someone trying to price chip and take value away from an exit multiple," Black says. "Or potentially you are exposed to reputational harm and at worst a product boycott. All of these issues are important, particularly if you are trying to IPO a business."

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