COULD YOU EXPLAIN US HOW YOUR ORGANIZATION ENGAGE WITH ESG ?
As a public institution, owned by the 28 Member States of the European Union, providing long term financing to sustainable projects, the EIB aims to add value by enhancing the environmental and social sustainability of the projects.
The EIB hence applies a set of environmental and social requirements throughout the project cycle and emphasizes the importance of adequate ESG policies and management systems through the legal documentation. The objectives of these standards being to outline the fund managers’ responsibilities in the process of assessing, managing and monitoring E&S impacts associated with the investments.
HOW DOES IT WORK IN TERMS OF PROCESSES DURING THE WHOLE INVESTMENT PROCESS?
The EIB engages fund managers as early as possible and requires that ESG be appropriately integrated into the overall fund’s investment strategy and operations – these requirements have been harmonised with our European Development Financial Institutions (EDFI) peers.
All private equity (PE) funds are required to have an ESG management systems (ESMS) commensurate to their underlying portfolio and activities. The ESMS is the overall management system that includes organisational structure, planning activities, responsibilities, practices, procedures and resources for developing, implementing, achieving, reviewing and maintaining compliance with local environmental and social laws and regulations as well as internationally recognised E&S standards such as EIB E&S Standards or the IFC Performance Standards. The lack of effective ESG management systems is deemed to create a high investment risk
The ESMS more specifically includes: - An E&S Policy which is a commitment of the Fund to promote E&S sustainability in its business operations, - A list of excluded activities, - ESMS procedures which define the procedures for identifying, assessing, managing, monitoring and reporting on E&S risks and issues, - Monitoring and reporting (E&S Performance report) systems, - Disclosure requirements. As part of the ESMS, it is also required that someone in the PE team be responsible for E&S related matters.
The important in our view is to ensure that this process is progressively mainstreamed within the team and throughout all the investment cycle. The aim is really to promote accountability and transparency in the investment cycle.
WHAT ARE SOME OF THE CHALLENGES YOU’VE ENCOUNTERED IN THE APPLICATION AND HOW DID YOU DEAL WITH THOSE CHALLENGES? WHAT IS, ACCORDING TO YOU, THE GENERAL PERCEPTION ON ESG PRACTICES?
For small PE funds and/or first time teams, there might be a lack of financial and human resources available. The EIB provides support through the assistance of its in-house E&S experts. In addition, the EIB might also provide technical assistance to fill gaps. They are also specialised service firms, such as Label R for instance, fully capable to support PE funds in this process. It might be better solutions for small teams, which cannot become specialists in E&S matters while dealing with all the other investment activities.
Even for larger funds, a challenge is also to ensure an active ongoing monitoring. We saw in the example of Abraaj how maintaining a proper governance with adequate internal checks is key. EIB puts lots of emphasis to ensure through its Anti-Money Laundering and KYC checks that there is a transparency in the flows and uses of the money invested.
The main challenge to me remains changing the perception of ESG practices from a negative additional requirement to a positive driver of long-term value for the funds.
Finally putting an emphasis on proper reporting and measurement is very important.
Being able for instance for a fund manager to report on the Sustainable Development Goals enables to provide tangibility to the impact generated and is a real value driver. We see more and more “impact funds” moving from trying to manage or reduce the negative externalities of their activities to intentionally trying to create a positive social and environmental impact. Beyond green washing, the ability to properly measure this impact might be a key differentiating factor for fund managers.
Aglaé Touchard-Le DrianSenior Investment Manager at the European Investment Bank Group
Aglaé is Senior Investment Manager at the European Investment Bank Group (EIB, EIF, GEEREF) where she deals with Impact of Private Equity in Emerging Countries and. Europe. She previously worked at EIF's social impact investing team and was exposed to capital investments in developing and emerging economies through her experience at both the EIB and the French Development Agency (AFD), within the Private Equity team of Proparco, where she also worked on renewable energy projects. Prior to that, Aglaé worked in strategic consulting (with LEK Consulting) and investment banking (with Rothschild & Cie).