LPs demand integrated approach to ESG – AVCJ Forum

Christopher Ailman, chief investment officer at California State Teachers Retirement System (CalSTRS) told delegates at the AVCJ ESG Forum that his firm preferred a principles-based approach to compliance in favor of a rules-based approach. This was described as including an emphasis on defining the most materially relevant issues for each company individually, as well as contemplating timeframes beyond 5-7 year horizons.

“We’ve had some managers come through the due diligence process where it’s clear it was just lip service and it was a check-the-box exercise,” Ailman said. “Whether it's public markets, private markets, real estate, private equity or infrastructure, our staff is paying attention to that and already screening that out early on in their process. For us, it’s become critical.”

Kathleen Bacon, a managing director at Harbourvest Partners, also stressed the importance of a principles-based approach. The firm, which focuses on venture and small buyout plays, implements the strategy with a long-term educational program.

The program consists of an ESG performance-rating scorecard that aims to encourage competition between GPs to improve their respective due diligence standards. Bacon noted that supplementing in-house ESG resource with external consultants could be a good approach to achieving improvements, but that understanding of policy fundamentals had to be ubiquitous throughout an organization.

“Firms that have dedicated ESG resources do make a difference because those people are focused 24/7 on these issues and they can design procedures and reporting for ESG internally,” Bacon said. “The only downside is that the team can think ‘that person is ESG and I’m a deal-doer so I don’t have to worry about that.’ The individual deal-doers need to appreciate that these are commercial risks, not just ESG risks.”

Frank Tang, CEO and managing partner at Fountainvest Partners, defined effective ESG policies as requiring good documentation, proper implementation and efforts to convince staff that the program was not just a compliance hurdle. He said many industry advisors see a strong emphasis on ESG programs as a potential disadvantage because it could imply a GP is subject to increased bureaucracy.  

“We don’t subscribe to that, but it serves as a reminder to us in terms of not making ESG as a completely separate process adding a long tail to the due diligence process,” Tang said. “Let’s integrate that. When we are negotiating with a company, let’s blend it in, rather than just waving a big flag that could generate some unnecessarily disadvantageous image.”

Cultural integration of ESG policies was found to be largely a matter of disclosure transparency. Tang said that his team was meeting this challenge by planning to begin submitting regular ESG reports to LPs by the end of next year.

“I know [GPs] don’t want to make [internal ethics issues] public, but it’s going to get out, and then we as the LPs are embarrassed by it,” said CalSTRS’ Ailman. “It would be nice to just have some information and know ahead of time that if we had a partner that had an ethical lapse, it was dealt with, and we can have some confidence instead of trying to figure out what the story is. In that case, we’re going to stay with that GP because of the way they managed it rather than putting it underground and trying to keep in internal.”

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• Topics
• LPs
• GPs
• Advisory
• Asia
• California State Teachers’ Retirement System (CalSTRS)
• Fountainvest Partners
• HarbourVest Partners
• ESG
• AVCJ Events