2013 PR ESG Survey

Sponsored by:

ENVIRONMENTAL | SOCIAL | GOVERNANCE2013 PE ESG SURVEY

LPs care more about ESG issues than ever before. PAGE 13

KKR and Doughty Hanson named ESG leaders in 2013. PAGE 15

European firms are far ahead of the U.S. in adopting ESG programs.

PAGE 6

What factors drive ESG efforts at the

firm level? PAGE 7

3www.pitchbook.com | [email protected] Private Equity ESG Survey

Table of ContentsIntroduction

Participant StatisticsESG Programs at PE Firms

ESG at Portfolio Companies The LP Point of View

Industry Leaders

456-1011-1213-1415

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IntroductionWhen we conducted our inaugural environmental, social and governance (ESG) survey of private equity (PE) professionals last year, it was startling to see that nearly half (49%) of our general partner (GP) respondents did not have an ESG program at their firm and had no plans to create one, despite heightened concern from limited partners (LPs) on ESG issues. What a difference a year makes—not to mention the fact that we had a higher proportion of European respondents this year, who are much more progressive when it comes to ESG issues. In our second edition of the ESG survey, a majority of GP respondents (60%) now work at a firm with an established ESG program and another 26% either have an ESG program in development or plan to create one in the near future. However, there are still some PE firms that see little value in ESG programs. As one GP respondent put it: “we think [ESG] is the most asinine initiative ever to come out in the business world.”

While some PE firms eschew ESG issues and think that strong fund performance is enough to attract LP commitments, the LPs themselves are telling a different story. Eighty-four percent of LP respondents say that ESG issues are at least somewhat important when deciding whether or not to commit to a PE fund, with 18% claiming they are essential. Furthermore, 24% said they would they would commit to a fund with slightly lower historical performance if the firm had a strong ESG program. Remember, many of the largest contributors to PE funds are public pension plans, endowments, foundations and sovereign wealth funds—institutions which not only are interested in returns but also have an image to maintain. “GPs have to be more aware of investors’ desire for knowledge of their investments beyond just the financial return,” commented one LP respondent, while adding that the responsibility ultimately falls on the investors: “GPs will only change if the LPs push them to.” One of the big takeaways from this year’s survey is that more PE firms are taking the necessary steps to make ESG a fundamental part of their investment approach. For example, 28% of GP respondents indicated that their firm produces a corporate social responsibility (CSR) report, up from 18% in 2012. And while finding effective metrics to monitor ESG performance continues to be the largest hurdle for ESG efforts, PE firms continue to find new ways to measure their ESG initiatives and have increasingly utilized forums, case studies and industry events and guidelines to fill the knowledge gap.

We hope that this survey serves as a lens into the current state of ESG issues in the PE industry and provides a starting point for developing a set of best practices that can be adopted by firms of all sizes. If you are interested in participating in future editions of the survey, or have any comments or suggestions for how we can improve this report, please contact us at [email protected].

What is ESG?

CSR: Corporate Social ResponsibilityEDF: Environmental Defense FundGIIRS: Global Impact Investing Rating SystemPEGCC: Private Equity Growth Capital CouncilPRI: Principles for Responsible InvestmentILPA: Institutional Limited Partners Association

Environmental: waste, water, electricity, transportation fuel, toxic chemicals, paper

Social: diversity, human rights, supply chain, employee engagement

Governance: policy, management structure, board-level oversight


16

4

11 11

6

15

8

13

16

2

0

2

4

6

8

10

12

14

16

18

<$500M $500M-$1B $1B-$5B >$5B N/A

Our GP respondents showed a much higher level of ESG awareness than they did last year, which is to be expected with the increased focus on ESG issues exhibited by LPs, industry organizations and governmental bodies. But a bigger factor is that there was a much higher proportion of European respondents in this year’s survey. As will become evident throughout this report, European investors place a much greater importance on ESG issues than investors from other regions.

Number of GP Respondents by AUM Number of LP Respondents by AUM

1 02 2 1

32

14

6

20

0

5

10

15

20

25

30

35

<$5B $5B-$25B $25B-$100B >$100B N/A

28

39

23

14

3

00

1

# of GP Respondents# of LP Respondents

Participant Statistics

Source: PitchBook

2013

2013

38

2

2012

9

2

2012

0

0

20122013

20131

0

2012

2012 2013


0%

20%

40%

60%

80%

100%

2012 2013 NorthAmerica

Europe

Yes

No; it iscurrently indevelopment

No; but wehave plans tocreate one

No

ESG Programs at PE FirmsPE firms show an increased focus on ESG issues in ‘13

The topic of ESG in PE has received increased attention from the media and investors over the last year, and PE firms have responded. In our 2012 survey, nearly half (49%) of GP respondents came from firms that had no ESG program and no plans to create one. Now, just 14% of GPs fall into that category, with nearly two-thirds (60%) of respondents this year indicating that their firm has already established an ESG program. In addition, 26% of respondents hail from a firm that is currently developing an ESG program or planning to create one in the near future. But as the charts above reveal, much of the rise in ESG consciousness in this year’s survey stems from our higher rate of European respondents, who tend to be more ESG savvy. More than three-quarters (78%) of European GPs have an established ESG program, compared to just half of North American GPs.

As to be expected, the ESG programs of our GP respondents are more developed than in last year’s survey; the percentage of firms with ESG programs that are at least two years old ballooned from 27% in 2012 to 49% this year. But the main takeaway from the graph on the upper right is the steep drop in the percentage of firms that do not have any sort of ESG initiatives—from 53% in 2012 to only 25% in 2013.

Even with substantially more PE firms having ESG programs in 2013 than 2012, the proportion of respondents that plan to increase their attention to ESG issues in the future still grew from 55% in 2012 to 89% this year. With more and more LPs pushing GPs on ESG issues, as we will explore on page 13, this certainly seems to be the logical move for PE firms in an increasingly competitive fundraising environment.

GP Q3: Do you plan to increase your attention to ESG issues in the future?

GP Q1: Does your firm have an ESG management program?

GP Q2: When did your firm start actively implementing ESG initiatives?

0%

20%

40%

60%

80%

100%


Europe

More than 5years ago

2-5 years ago

1-2 years ago

Less than 1year ago

Do not haveESG initiatives

0%

20%

40%

60%

80%

100%

2012 2013

Yes

No

Source: PitchBook

Source: PitchBookSource: PitchBook


Why are PE firms paying more attention to ESG?

Given the fact that PE firms are concerned with the profitability of their investments first and foremost, it seems somewhat odd that environmental and social consciousness continues to rank significantly higher than cost management and operational efficiency as a driver of ESG programs. It would appear that PE firms are not as incessantly focused on the bottom-line as they are typically characterized—or perhaps respondents are simply more inclined to display high-minded ideals when being surveyed.

One factor directly related to the success of PE investments that did rank highly was risk management, with 64% of GP respondents citing it as a contributor to their ESG efforts, up from 55% in 2012. This is corroborated by the fact that ESG issues are considered most frequently during the due diligence process.

Unsurprisingly, LPs continued to be a top driver of ESG programs at PE firms, although the proportion of GP respondents that identified LPs as being a factor in their ESG efforts dropped slightly from 74% in 2012 to 69% in 2013. With LPs being such an important motivator for PE firms, and our GP respondent base being fairly attuned to ESG issues, it is somewhat odd to see that ESG issues are only taken into consideration by 76% of PE firms during the fundraising process.

GP Q4: What factors drive your ESG efforts? (multiple choices permitted)

GP Q5: When do you consider ESG issues? (multiple answers permitted)

“It’s important that ESG management is integrated with the overall management of any business and not treated as a separate or somehow less important activity driven only by external demands.”

-Philip Rowland, Senior Operating Partner at TDR Capital LLP

71% 74%

55%

63%

42% 42% 39%

29%34% 37%

16%

73%69%

64%60%

45%

36%31% 29%

24% 24%

11%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2012

2013

LPs Riskmgmt

Corporategovernance

Portfoliocompanies

Gov’tregulation

Employeeinterests

Costmgmt

Operationale�ciency

CompetitorsEnviron.& social

consciousness

Brand/image

0% 20% 40% 60% 80% 100%

Exit

Holding period

Due diligence

Fundraising

20132012

Source: PitchBook

Source: PitchBook


0% 20% 40% 60% 80% 100%

Essential Very important Important Somewhat important Unimportant

Monitoring the successof ESG initiatives

Developing an ESG mgmtprogram at the �rm level

Using industry guidelines

Engaging outsideESG experts

Outlining ESG philosophyin LP agreement

Requiring portfolio co’sto develop a CSR report

Hiring in-houseESG professionals

20132012

20132012

20132012

20132012

20132012

20132012

20132012

What needs to be included in an ESG program?GP Q6: How important are the following factors when developing an ESG program?

GP Q7: What is the biggest challenge for ESG programs and initiatives?

In last year’s survey, GPs indicated that developing an ESG management program at the firm level was the most important factor when developing an ESG program. While GPs saw this as even more crucial in this year’s survey, monitoring the success of ESG initiatives overtook it as the most important factor of an ESG program, which makes sense with the high priority that GPs place on metrics of all stripes. But despite this development, finding effective metrics to monitor ESG progress continues to be the biggest challenge for PE firms. For firms that need guidance in this regard, a rundown of some of the most popular systems and resources currently available for gauging the ESG performance can be found on page 12.

Amazingly, only 19% of GP respondents found it to be very important or essential to outline their ESG philosophy in limited partnership agreements, despite 76% of firms claiming to consider ESG issues during fundraising. If a PE firm is going to invest the time and resources into an ESG program, why wouldn’t they want to make those efforts explicit to their investors?

Cost was identified as the biggest challenge to ESG efforts by roughly one in five GP respondents in 2012 but cited by just 7% of respondents this year. Several factors likely led to this decrease, such as more readily available resources to assist in ESG efforts and the fact that ESG programs can actually lead to cost savings.

Many GPs expressed the desire for industry groups to provide more guidance and standardized benchmarks for ESG metrics, which should lead to higher prioritization of ESG issues by both GPs and LPs.

42%

24%

18%

7%9%43%

38%

7%

7%5%

Cost

Employee

Other

Implementation

E�ective metricsto monitorperformance

participation

2012

2013

Source: PitchBook

Source: PitchBook


How to share your firm’s ESG story

Creating the CSR ReportWho

The audience for a PE firm’s CSR report will obviously vary depending on the firm’s size and level of public visibility, but the most crucial audience for all PE firms will no doubt be LPs. For firms that put in the effort to develop an ESG program, it is imperative to clearly articulate what the program is accomplishing to both current and potential investors. The CSR report is the ideal format for this and should include everything from high-level ESG philosophies to specifics on how ESG performance is measured and how it impacts the firm’s investments.

What

The actual content of the CSR report will vary from firm to firm, but there needs to be substance. PE firms that include quantitative results in their CSR report differentiate themselves from those that simply have nice photos. Key details all firms should consider in their CSR report include:

• Objectives of the ESG program• General approach to ESG issues• How ESG performance is measured• Updates on specific ESG initiatives at both

portfolio companies and the firm itself

When and Where

Most firms produce a CSR report on an annual basis, but LPs appreciate a high level of communication from their GPs. As such, it would also be wise to include ESG updates in quarterly reports. Making the CSR report easily accessibly online allows potential future investors, acquisition targets, media outlets and other interested parties to see the firm’s commitment to ESG issues.

GP Q8: Does your firm produce a corporate social responsibility (CSR) report?

The CSR report not only articulates a firm’s ESG program to outside parties, but also underscores the importance the firm places on ESG issues and highlights successes to people within the firm. The percentage of PE firms with a CSR report—a hallmark of a well-established and mature ESG program—expanded from 18% in 2012 to 28% in 2013. In the future, more PE firms will likely allocate the resources necessary to produce the CSR report as their ESG programs become more mature.

Examples of CSR Reports

All PE firms will take a different approach when it comes to crafting the CSR report. Some produce it as a standalone publication while others incorporate it with their annual review. Here are some examples of how the top PE firms share their ESG stories:

KKR: 2012 ESG and Citizenship Report

Carlyle: Corporate Citizenship

CalPERS (LP): Towards Sustainable Investment

0%

20%

40%

60%

80%

100%


Europe

Yes

No

Source: PitchBook

http://www.kkr.com/_files/pdf/KKR_ESG-Report_2012.pdf

http://www.carlyle.com/sites/default/files/TCG_CCR13-final.pdf

http://www.calpers.ca.gov/eip-docs/about/press/news/invest-corp/esg-report-2012.pdf


Staying current with ESG developments

GP Q9: How do you stay abreast of developments in ESG? (multiple answers permitted)

GP Q10 & LP Q1: Which ESG-related groups or programs do you belong to, endorse or participate with? (select all that apply)

ESG Groups & Programs

PRI: Developed by a group of international institutional investors in conjunction with the United Nations, the PRI is a set of six principles that guide the investment decisions for more than 1,000 signatories.

PEGCC Guidelines for Responsible Investment: PEGCC, the main lobbying group for the PE industry, developed its Guidelines for Responsible Investment through a collaboration with institutional investors around the world and the PRI. The Guidelines serve as a starting point for PE firms that are developing ESG programs.

ILPA Private Equity Principles: Endorsed by more than 240 investors, the ILPA’s Private Equity Principles provide a blueprint for GPs and LPs to align their ESG efforts.

ESG Disclosure Framework: Over the course of 16 months, a group that included 20 PE associations, 10 prominent GPs and dozens of LPs from 11 countries came together to create the ESG Disclosure Framework. Published earlier this year, the document is centered around ESG disclosures in PE investments, outlining five objectives relating to fund due diligence and three pertaining to disclosures during the life of the fund.

PEI Responsible Investment Forum: The forum, which is co-hosted by the PRI, informs PE firms on ESG strategies that can be employed to develop better portfolio companies.

53%

35% 33%

16%12%

7%14% 16%

50%

30%

2% 4%0% 0%

15%

30%

0%

10%

20%

30%

40%

50%

60%

UN PRI ILPA PEPrinciples

PEGCCResponsibleInvestmentGuidelines

EnvironmentalDefense Fund

GlobalReportingInitiative

Business forSocial

Responsibility

Other None

GPs

LPs

We don’t

In-house experts

Outside consultants

Forums, case studies& industry events

Industry guidelines

Independentresearch

0% 20% 40% 60% 80%

2013

2012

Source: PitchBook

Source: PitchBook


ESG at Portfolio CompaniesGPs see ESG becoming more critical in operations

GP Q12: How important are ESG issues when implementing operational improvements at a portfolio company?

GP Q11: How important are ESG issues when exiting a company via __________?

PE firms have changed their tune in the last year when it comes to utilizing ESG initiatives at their portfolio companies. Thirty-one percent of GP respondents this year said that ESG issues were essential or very important when looking to improve portfolio company operations, compared to just 18% in 2012. European GPs were much more inclined to find ESG issues to be an important factor in portfolio company operations, with 86% saying they were at least important.

With the scrutiny that comes with being a public company, GP respondents found ESG issues to be significantly more important for companies being exited via IPO as opposed to a sale to corporate acquirer or another PE firm. ESG issues were found to be least important when selling to another PE firm, which was somewhat surprising given the relatively high level of ESG focus and awareness indicated from respondents throughout our survey—particularly when performing due diligence.

Much of the effort around ESG programs centers around initiatives that can cut costs, improve efficiency and enhance the operations of the portfolio company, but philanthropic and volunteer programs are an

GP Q13: Do you have philanthropic and/or employee volunteer programs at your portfolio companies?

ideal way to engage employees from across the organization. To that end, more than half (52%) of GP respondents encourage these types of initiatives at portfolio companies but hardly any (2%) make them a requirement.

0%

20%

40%

60%

80%

100%

Corporateacquisition

Secondarybuyout

IPO

Essential

Veryimportant

Important

Somewhatimportant

Unimportant0%

20%

40%

60%

80%

100%


Europe

Essential

Veryimportant

Important

Somewhatimportant

Unimportant

0%

20%

40%

60%

80%

100%

2012 2013

Yes; they arerequired

Yes; they areencouragedbut notrequired

No

Source: PitchBook Source: PitchBook

Source: PitchBook


How do GPs monitor ESG at portfolio companies?

International Organization for Standardization (ISO)

Recognized as an international leader in voluntary standards systems, ISO standards address a vast array of ESG issues, including energy and environmental management and social responsibility. ISO develops its standards through a consensus process that draws on experts and industry professionals from around the globe. The organization has published more than 19,500 International Standards since its inception in 1947.

Global Impact Investing Rating System (GIIRS)

Initiated as a project by B Lab, an independent non-profit organization, GIIRS assesses the social and environmental impact of both funds and individual companies. GIIRS utilizes third-party documentation and ratings methodologies developed by an independent Standards Board. One of the biggest advantages to using a third-party system is that it addresses the diverse nature of companies and funds by evaluating them on a range of criteria pertaining to specific industries, impact areas and investor preferences.

Impact Reporting and Investment Standards (IRIS)

Developed by the Global Impact Investing Network (GIIN), IRIS is a catalog that offers standardized metrics that can be employed to measure social, environmental and financial performance. Some of the specific variables that IRIS can help quantify include: governance, social policies, employee training, greenhouse gas emissions and biodiversity.

Commonly used ESG rating systems

GP Q15: Do you require portfolio companies to develop a CSR report?

GP Q14: Do you require portfolio companies to use a systems approach to manage environmental performance?

“Our next initiative around awareness is bringing our portfolio companies together to share best practices in ESG, discuss the issues and opportunities and re-confirm our expectations for management of this area”.

-Philip Rowland, Senior Operating Partner at TDR Capital LLP

0%

20%

40%

60%

80%

100%


Europe

Yes; ISOcerti�cationrequired

Yes; othertype ofcerti�cation

No

0%

20%

40%

60%

80%

100%


Europe

Yes

No; butcurrentlyworkingtowardsit

No

Source: PitchBook

Source: PitchBook


The LP Point of ViewLPs care more about ESG issues than ever beforeLP Q2: How important are ESG issues when evaluating a GP and deciding to commit to a fund?

GP Q16: How important are ESG issues when drafting limited partnership agreements?

LP Q3: How has your focus on ESG issues changed in the last three years?

GP Q17: Have LPs expressed increased concern about ESG issues in the last three years?

As was the case in 2012, LPs continue to indicate a high level of concern regarding ESG issues. The results largely mirror those from last year, but the LPs that were simply interested in ESG issues last year are beginning to view them as essential. Nearly one in five (18%) LP respondents reported that ESG issues were essential when evaluating GPs while last year not a

single LP fell into this category. European LPs, like their GP counterparts, are particularly concerned with ESG; every European LP respondent said that ESG issues were at least important when committing to a fund.

GPs are more attuned to the ESG concerns of LPs than they were last year, but there is still room for improvement, with 27% of GP respondents saying

0%

20%

40%

60%

80%

100%


Europe

Essential

Veryimportant

Important

Somewhatimportant

Unimportant

0%

20%

40%

60%

80%

100%


Europe

Increased

Stayed thesame

Decreased

0%

20%

40%

60%

80%

100%

2012 2013

Yes

No

Source: PitchBook

Source: PitchBook Source: PitchBook

0%

20%

40%

60%

80%

100%


Europe

Essential

Veryimportant

Important

Somewhatimportant

Unimportant

Source: PitchBook


LP Q5: Why does ESG matter in your investment decisions? (multiple choices permitted)

LP Q7: Would you rather commit to a GP with no ESG program but top quartile performance or a GP with a strong ESG program and slightly lower performance?

LP Q4: How do you expect your focus on ESG issues to change in the future?

LP Q6: What areas are you most concerned about when it comes to ESG? (limit three)

that ESG issues are unimportant when drafting limited partnership agreements.

Sixty-two percent of LP respondents say that their focus on ESG issues has increased in the last three years, with just one respondent saying that they are less concerned with ESG issues than in the past. GPs appear to be getting the message loud and clear. In 2012, only half of GP respondents said that LPs had expressed increased concern over ESG issues, but that surged to 77% in this year’s survey.

Even though LPs have shown significantly more attention to ESG issues in recent years, 60% of LP

respondents said they will continue to increase their focus in the future. This should only serve to motivate GPs to build out their ESG programs even faster.

Environmental and social consciousness ranks highly among LPs as a motivator to address ESG issues, but they are also concerned with the risk profile of their investment and their brand and image. Corporate governance, business integrity, and environmental health and safety were the main concerns of LPs when it came to specific ESG issues. Interestingly, European were much more inclined to care about social issues, which was their second highest concern.

0%

20%

40%

60%

80%

100%


Europe

Increase

Stayed thesame

Decrease

0%

20%

40%

60%

80%

100%

2012 2013

ESG program& lowerperformance

No ESGprogram &higherperformance

Source: PitchBook

Source: PitchBook

Source: PitchBook

Source: PitchBookSource: PitchBook

0% 20% 40% 60% 80% 100%

2013

2012

It doesn’t

Competitors

Corporate governance

Governmentregulation

Employee interests

Brand/image

Risk management

Environmental/socialconsciousness

Other

0% 20% 40% 60% 80% 100%

2013

2012Other

None

Resourcepreservation

Corporate governance

Business integrity

Social issues

Climate change

Environmentalhealth & safety


Industry LeadersAs part of this year’s survey, PitchBook asked respondents to name some of the firms they viewed as leaders in ESG practices. It was encouraging to see firms of all different sizes and from both sides of the Atlantic be named, but there were two clear industry leaders : KKR and Doughty Hanson. KKR was the most frequently named leader in ESG practices in both this and last year’s survey, which is no surprise considering the firm initiated its Green Portfolio Program in 2008 and maintains an ongoing partnership with the Environmental Defense Fund. Doughty Hanson, a London-based European private equity firm, wasn’t mentioned in last year’s survey, but was cited as a leader by several firms and LPs this year. Here’s a look at what makes each firm so respected among their peers when it comes to ESG issues:

KKR was the firm most frequently named as a leader in ESG practices for the second year in a row. The firm launched its Green Portfolio Program in 2008 to generate operational improvements at its portfolio companies. The program was created in partnership with the Environmental Defense Fund and focuses its efforts on reducing emissions, electricity usage and other environmentally focused operational improvements. KKR estimates that through its first five years the program has generated $917 million in cost savings and additional revenue.

According to KKR, 25 companies have participated and avoided more than 1.8 million metric tons of GHG emissions since the program’s inception. Also included on the Green Portfolio Program website are numerous case studies and statistics that show the impact of the firm’s ESG programs. For example, KKR portfolio company Oriental Brewery, which installed a modified boiler system and optimized the fermentation processes in-house, reported that from 2008 to 2010, the company avoided $17.7 million in energy costs and 19 million cubic meters of water consumption.

KKR also operates initiatives at its portfolio companies to improve transparency, employee health and sourcing practices and supply-chain risks.

Doughty Hanson has been active in ESG issues and practices for several years and became the first PE signatory to the PRI in June 2007. The London-based PE firm was also one of the first to produce an ESG-focused report, partnering with the World Wildlife Fund in 2011 for “Private Equity and Responsible Investment.”

On its website, the firm includes a list of ESG policy items it seeks to achieve, a case study for one of its portfolio companies, details on its own carbon neutrality efforts, and information on social investment and charitable efforts.

As was the case for many of the GP respondents to our survey, Doughty Hanson sees undertaking ESG issues not as a burden, but as a way for the firm and its portfolio companies to enhance value, elevate the brand and reduce risks associated with poor governance. According to the firm, the projects it undertakes are: “commercially driven and are designed to mitigate the financial and reputational risks to which Doughty Hanson, our portfolio companies and our investors are exposed. They also create additional opportunities to increase the value of our portfolio companies, enhance their brands and better position them for exit.”

http://green.kkr.com

http://www.kkr.com/company/responsibility

http://www.doughtyhanson.com/responsible-investing.aspx

http://www.doughtyhanson.com/private-equity/esg-engagement.aspx

http://green.kkr.com/

http://green.kkr.com/

Source & filter

investment opportunities

Monitor peer activity &

industry trends

Identify the right LPs for

your next fund

Benchmark your fund

performance

Run public & private

comparables

Augment portfolio

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2013 PR ESG Survey

Economy & Finance