By Permira’s Head of ESG, Adinah Shackleton
For the past seven years, Permira has taken a formalised approach to Environmental, Social and Governance ("ESG"), winning a number of awards during this period. ESG continues to be an increasingly important consideration for us throughout the duration of our partnership with portfolio companies, from due diligence through to exit.
Outlining our approach to ESG
During the due diligence process, our team works on a one-on-one basis with deal teams, to understand the relevant risks and opportunities and how they are factoring these into the pre-investment process. Investment teams start considering ESG right from the initial screening stages through to the investment as they cover any potentially material ESG risks or opportunities (for example, regulatory compliance, liabilities, cost savings, new revenue streams or potential reputational issues).
There have been certain instances where significant ESG issues have played a part in a decision to walk away from a deal. However, in the majority of cases, our approach involves assessing the associated short and longer-term risks and opportunities, and then considering how portfolio company management teams can manage those once the investment has been made.
Post-investment, we engage with portfolio company management teams to understand how they manage ESG issues in more depth, and focus on the main opportunities for further improvement. For some companies, we also undertake site visits during the investment to see how ESG issues are managed on the ground.
Driving better ESG outcomes across our funds' portfolio companies
Our approach is to work in collaboration with management teams to identify ESG initiatives which they also see value in focusing on. An important part of this is to also demonstrate the business case, in addition to the benefits for the environment, workforce or communities. For example, energy efficiency programmes will lead to direct cost savings, while fewer health and safety incidents will result in less lost time.
Often, significant value will be created via ESG initiatives during the period in which we are invested. It can, however, take time to see the benefits. That is why we engage with portfolio companies to build up their ESG management systems, so that they are capable of continuing with and building on valuable work in this area over the long term.
The British footwear brand Dr. Martens (P5, 2014) was one of the first businesses the Permira fund backed in 2014. Early on, we were able to identify a number of ways that the company could extend and formalise pre-existing sustainability initiatives, and develop a more formalised sustainability strategy.
The strategy focuses on a number of key areas, including supply chain and ethical trade. To manage these issues, the firm has developed long-term relationships with a small number of trusted suppliers. Dr. Martens also works with supply chain auditing company Impactt, which frequently visits supplier sites auditing against Dr. Martens' Supplier Code of Conduct. In 2016, 20,500 first tier supplier employees were covered by Dr. Martens' Supplier Code of Conduct, and audits are undertaken on new and existing suppliers, with 70% of Tier I footwear suppliers audited in 2015 and 2016.
Since the Permira funds’ investment, Dr. Martens has formed a sustainability committee that reports directly to the Board, while also offering customers more information on its approach to sustainability. As Dr. Martens continues to develop its approach, we are pleased to have promoted both high-quality internal dialogue and greater external transparency around ESG strategies that bring genuine business benefits.
More generally, ESG is an important part of the knowledge-sharing we encourage between portfolio companies and with our own Investment Professionals.
Collecting material and informative ESG data
We have a data management system that we use to collect financial and operational information from portfolio companies, and this incorporates several core ESG metrics. We are also tailoring metrics for certain companies, to enable better monitoring of ESG matters which are material to their business.
Investors in the funds increasingly ask for more information on our overall ESG performance. Investors used to focus on whether private equity funds had a policy and approach to integrating ESG in the investment process. Now, we are asked for company-by-company performance reporting.
In response, we have developed a new reporting format which highlights the key areas that companies are working on, their aims for the coming year, certifications they hold and the international standards they adhere to. We also report to investors and other stakeholders through annual Principles for Responsible Investment (PRI) reports and to investors using PRI’s Limited Partners Due Diligence Questionnaire.