Societe Financiers ESG investing as a part

Societe Financiers • ESG investing as a part of Responsible Investing • concepts • integration into investment strategy

ESG • Environmental criteria looks at how a company performs as a steward of the natural environment • Social criteria examines how a company manages relationships with its employees, suppliers, customers and the communities where it operates • Governance deals with a company’s leadership, executive pay, audits and internal controls, and shareholder rights.

Environmental • Company Activity: • Manage resources and prevent pollution • Reduce emissions and climate impact • Execute environmental reporting/disclosure. • Positive Outcomes: • Avoid or minimize environmental liabilities • Lower costs and increase profitability through energy and other efficiencies • Reduce regulatory, litigation and reputational risk

Social • Company Activity: • • Promote health and safety Encourage labor-management relations Protect human rights Focus on product integrity • Positive Outcomes: • Increase productivity and morale • Reduce turnover and absenteeism • Improve brand loyalty

Governance • Company Activity: • Increase diversity and accountability of the Board • Protect shareholders their rights • Report and disclose information • Positive Outcomes: • Align interests of shareowners and management • Avoid unpleasant financial surprises or “blow-ups”

Why ESG and usefulness of it • a “double dividend” in the form of a better rate of return with lower risk. • Long-run benefits of including long term risk. • Firms like Blackrock and Vanguard have not only incorporated ESG into their compliance and legal risk-mitigation strategies, but also into their investment strategies. Wellingthon: “ ESG integration is simple: to increase financial returns while upholding the fiduciary duty to incorporate any known risks into the investment process. ”

ESG organizations • UN Principles for Responsible Investment - www. unpri. org • UK Stewardship Code • Japan Stewardship Code • Hong Kong Principles of Responsible Ownership

UN Principles for Responsible Investment • Principles for responsible investment: 1. We will incorporate ESG issues into investment analysis and decision-making processes. 2. We will be active owners and incorporate ESG issues into our ownership policies and practices. 3. We will seek appropriate disclosure on ESG issues by the entities in which we invest. 4. We will promote acceptance and implementation of the Principles within the investment industry. 5. We will work together to enhance our effectiveness in implementing the Principles. 6. We will each report on our activities and progress towards implementing the Principles.

UK Stewardship Code 1. 2. 3. 4. 5. 6. 7. Institutional Investors should publicly disclose their policy on how they will discharge their stewardship responsibility. Institutional Investors should have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclose Institutional Investors should monitor their investee companies Institutional Investors should establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder values Institutional Investors should be willing to act collectively with other investors where appropriate Institutional Investors should have a clear policy on voting and disclosure of voting activity Institutional Investors should report periodically on their stewardship and voting activities

Case • Wellington case for BA

ESG management system • ESGMS are now well-established as good practice in the private equity industry, but these systems are arguably more established and of higher quality in the emerging markets than in the developed markets. This is due to a number of factors: • First, in many emerging markets Developed Financial Institution (DFIs) are large and active investors in the private equity space. The development mandate and public ownership of DFIs mean that a focus on ESG standards has been hardwired into much of the emerging markets private equity industry since the early days. • Second, enforcement of national laws and standards can be less rigorous in the emerging markets than elsewhere, so a greater burden of responsibility for managing ESG risks falls upon GPs. • Finally, the practice of emerging markets private equity is focused on creating value through growth and operational improvements, rather than through leverage as is often the case in developed markets. So GPs take an active interest in how good ESG standards can, for example, reduce costs or open up new markets.

Integrating ESG into the investment process • Screening • Due diligence • Investment decision • Legal agreements • Monitoring • Exit

Screening During the investment screening process, a GP should be undertaking basic checks to ensure that the prospective Portfolio Company doesn’t fall under contractual exclusions in the Fund documentation. It should also be checking for any obvious red flags that might halt an investment. The screening stage provides an early opportunity for the GP and the management of the prospective Portfolio Company to discuss the Fund’s ESG requirements and for the GP to judge the willingness of the promoter or management to assess manage and improve standards as necessary. This early communication is the key to managing expectations and ensuring alignment. It is also the time to plan an appropriate due diligence and budget for the use of consultants if necessary.

Due diligence • The ESG strand of the due diligence process should check that the business is compliant with the Fund’s policies and relevant legislation. The Toolkit has a comprehensive suite of guidance and downloads to help with this process, with specific materials for different sectors and different ESG risks. Due diligence should uncover any liabilities that the business may face – these of course may affect the valuation – as well as risks and opportunities to add value. The principal output of the exercise should be an ESG action plan that can be incorporated into the investment agreements, placing an obligation on the prospective Portfolio Company to do specific things at specific times.

Investment decision • The decision of whether to make the investment should include consideration of how ESG risks and opportunities affect the investment thesis and whether the Investment Committee believes that the fund and the company have the necessary capacity, expertise and commitment to implement any ESG improvements that have been agreed to ensure the fund meets its obligations to its LPs.

Legal agreements • By the time the investment agreement is being negotiated, a Portfolio Company should already have a good understanding of what the Fund requires from an ESG perspective; and it should have planned for the necessary financial and human resources to comply with the terms of the investment agreement. It should not come as a surprise to the Portfolio Company that the Fund requires an investment or shareholders’ agreement that includes detailed ESG clauses and clearly outlines how ESG matters will be handled during the life of the investment.

GP should ensure sufficient postinvestment influence. ESG helps to do that • verify due diligence findings via representations and warranties; • achieve a clear agreement and record of what the Fund requires and the Portfolio Company commits to doing in relation to ESG; • put in place agreements and structures that will give the Fund leverage to use in the future should the Portfolio Company fail to implement what has been agreed; • establish mechanisms for monitoring, such as information and inspection rights; • prevent inappropriate transactions; • address issues that arise; and • take action in cases of flagrant non-compliance, including visits and investigations, compensation and in extreme cases cease funding and/or exit rights.

Monitoring • After investment, the Portfolio Company should follow the strategy agreed with the Fund, including any ESG action plan set out in the investment or shareholders agreement. Included in this (as discussed above) should be the ESG information that is provided to the Fund on a regular basis; notification triggers, such as serious incidents; information and facilities it wishes to have access to; and whether the Fund wishes to use a consultant as part of the monitoring, including details of how costs will be covered. Typical rights CDC would expect to be in play during the investment monitoring period would be access, information and inspection rights; copies of papers and minutes; and reporting of serious or fatal incidents and where appropriate Fund representation on the Board, including any sub-committee tasked with monitoring ESG if such a committee exists.

Exit • The value of implementing ESG improvements in investees should be used as a selling point during exit. ESG processes and improvements should be included in the private placement memorandum and be a feature of roadshow presentations. Potential buyers, especially international trade buyers or strategic investors, will draw comfort from a well-managed and well-documented ESGMS. This also ensures that prospective buyers cannot use ESG factors to negotiate a lower price by arguing for expensive warranties on potential ESG liabilities.

Summary/Conclusion • Good ESG management is as important as good management of people, financials or other levers of a business. While there are considerable opportunities for value creation, the advent of social media and citizen journalism means that the potential for ESG risks to become reputational threats or jeopardise a business’ license to operate is greater than ever.

Practice of ESG • Start your valuation with ESG to determine factors • May use www. msci. com or www. sustainalytics. com (Pricy) • Come up with your metric or index for estimating ESG factors.