Understanding Responsible Investment #14 - Focus on Private Equity

Dorothée Chapuis: Hello everyone and welcome to the fourteenth and penultimate episode of our "Understanding Responsible Investment" podcasts series. I am Dorothée Chapuis, Head of CSR for Societe Generale Private Banking Europe. To address today's topic I am very pleased to introduce Sophie Bernard, Private Equity Funds Expert at Societe Generale Private Banking. In this episode, we propose to explore together sustainable investment in the non-listed assets sphere.

Dorothée Chapuis: Hello Sophie!

Sophie Bernard: Hello Dorothée!

Dorothée Chapuis: Before getting into the heart of the matter, could you remind us briefly what the Private Equity asset class consists of, please?

Sophie Bernard: Yes, of course, Dorothée. Private Equity consists of taking stakes in the capital of unlisted companies, at various stages of their development. It brings together the skills of fund managers, analysts and company directors with the common objective of creating value. Private equity is an essential vector of economic development and is now recognized as a driving force for company growth, job creation and the promotion of new generations of business leaders. In general, private investors access this asset class through funds that are often referred to as private equity funds. But while private equity offers interesting diversification with potentially high returns compared to other asset classes, it is still an investment with a risk of  partial or full capital loss. It is also an illiquid investment, especially for the first four or five years, with no possibility of disposal. The subscription commits the investor over the long term, with the investment being unwound mainly between the fourth or fifth year and the tenth year.

Dorothée Chapuis: Thank you for that reminder. Now let's get down to the facts, Sophie. How do the managers of these private equity funds integrate sustainability factors? Because, as you can guess, the investment process of a private equity fund is not comparable to that of a fund invested in listed shares.

Sophie Bernard: Exactly, Dorothée. The study phase of the file is longer, the business model is dissected because the investor, who is going to make a long-term commitment, needs to understand where, how and on what scale value creation is possible. Thus, by scrutinising the company and having frequent contact with the management team, private equity fund managers are able to assess the company's degree of commitment to sustainable development issues under the ESG pillars that we now know: Environment, Social and Governance. And they are therefore able to introduce ESG factors into their investment selection criteria. This is a growing trend among private equity fund managers. A recent study by PwC France⁽¹⁾ from 2019 shows that in France, more than 95% of the management companies surveyed report having an ESG policy in place or under development and 89% use and develop key performance indicators to monitor, measure and report on the progress of their responsible investment policy. Many of these management companies are signatories to the UN PRI (United Nations Principles for Responsible Investment).

Dorothée Chapuis: Indeed, Sophie, we can therefore understand that responsible investment can be deployed in private equity, with a direct impact on companies: because of the investment fund's ownership of the company and the close proximity between the funds managers and the companies - the former very often having a seat on the board of directors of the latter. This proximity offers investors a real lever of commitment which, I remind you, is one of the characteristics of responsible investment. But is it easy to implement a responsible investment process in private equity funds?

Sophie Bernard: This is not always easy, especially because extra-financial data is not always formalized or readily available. Large companies are obliged by regulation to publish their CSR (Corporate Social Responsibility) report and, as a result, have implemented ESG indicators; thus, they all have an ESG rating. In the small and medium-sized (SME) business segment, companies have generally taken this step as well. However, not all SMEs are yet aware of their social responsibility. They are also less equipped in this area and the information they communicate is not always homogeneous or comparable, which makes the task of investors a little more difficult. However, funds are increasingly raising awareness and standardising their holdings by asking them to fill in harmonised questionnaires: the analysis of ESG criteria, which was very often qualitative, is thus becoming increasingly quantitative. The ESG approach, which used to be guided by ESG risk analysis in the pre-investment phase, is now increasingly part of the fund's post-investment action plan. The fund thus contributes to improving the consideration of sustainable development in the company's operations.

Dorothée Chapuis: Let's take the example of the carbon footprint. Listed companies are increasingly able to provide the amount of their direct and indirect CO2 emissions. For SMEs, the exercise can be more difficult: focused on their development, less mature, they do not always have sufficient resources to calculate their carbon footprint. But what is positive is that there is a growing offer to assist SMEs in structuring their extra-financial data, which funds are increasingly imposing. Sophie, how do you see the private equity industry evolving in terms of responsible management?

Sophie Bernard: As you can see, private equity funds are making progress and I am convinced that taking ESG factors into account is becoming the norm. A good illustration of this trend is the France Relance label set up by the French government. This label recognises funds that are committed to rapidly mobilising new resources to support the equity and quasi-equity of French SMEs and Midcaps, whether listed or not. In order to use the label, mutual funds must comply with the eligibility criteria defined in the Relance Label Charter, including a set of ESG criteria, which must guide the investment and shareholder engagement policy of the labelled funds. Another emerging trend in the private equity sector is impact investing, i.e. investments that have both a financial and a societal objective, particularly in the environmental field.

Dorothée Chapuis: On this last notion I invite our listeners to listen to episode number 10 which deals with impact investing. In any case, we understand that the non-listed companies segment is an interesting space for responsible investment. Thank you very much Sophie for these clarifications.

Sophie Bernard: You're welcome, thank you Dorothée.

This podcast is part of a series of episodes proposed by Societe Generale Private Banking to understand responsible investment. It is available on the Spotify and Apple Podcasts streaming platforms via the "#Private Talk by Societe Generale Private Banking" program and on our website www.privatebanking.societegenerale.com. Feel free to subscribe to be notified when the next episode is released and to spread the word.

⁽¹⁾  https://www.pwc.fr/fr/publications/developpement-durable/private-equity-2019.html

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