Our 2021 ESG survey has been conducted through the updated PRI online reporting tool. Just above half of 64 private equity fund managers that responded to the survey are signatory to the UN PRI. According to managers’ responses, all but one of them incorporate ESG considerations in their investment decisions. While most fund managers have an ESG policy in place and report ESG data to their investors, only a few publicly support the TCFD recommendations. The proportion of managers that have identified climate related metrics to monitor the exposure of their portfolio companies to physical risk is still quite low, but twice as much use metrics to monitor the transition climate risk. About half of the managers currently use SDGs to identify the sustainability outcomes of their investments.

Fund managers’ responses to the annual ESG survey are being assessed and translated into scores which we summarize in the figure to the right. We are using the PRI’s 2021 assessment methodology for this purpose[1]. Managers are being assessed on several indicators that are related to their responsible investment policy, strategy, governance, stewardship, climate change and transparency (ISP score). Furthermore, we also assess how advanced managers are in their integration of ESG considerations in different stages of their investment process (PE (module) score). The scores for each module range between 0% to 100%.

The distribution of ISP and PE scores suggests a wide variation of private equity and VC managers in terms of their responsible investment policies and their implementation. There are some absolute beginners, with a 0% score, and one manager with a maximum score (100%) on the PE module. Overall, many private equity and VC managers still need to formalize their policies, stewardship activities and climate change risk and opportunities management. However, they seem to be more advanced in the actual incorporation of ESG considerations in different stages of the investment process.

We observe important differences in the ESG performance between regions and strategies, with the US-based VC firms and buyout firms investing in tech businesses showing relatively low scores and the European buyout firms dominating the other side of the spectrum. The opportunity for Stafford lies in the engagement with the group of managers that are still at the beginning of their ESG integration journey. Using our knowledge and experience we will provide managers with the feedback on their assessment results and have a dialogue with these managers on how they can develop their ESG frameworks further.

Overall, more than one-third of the managers in our ESG engagement program currently provide some CO2-related information in their disclosures to investors. This percentage is still low, and we expect that reporting on CO2 emissions, their abatement and avoidance will improve in the future, also given the upcoming EU-regulations. Sustainability-focused managers usually report the reduction in CO2 emissions (26% of managers) due to the products or services of their portfolio companies, while sector-agnostic managers typically disclose the CO2 footprint of their portfolio companies due to their operations (31%). Only 10% of the managers currently report both, CO2 emissions and their reduction due to products and services. The number of private equity firms disclosing their internal CO2 footprint increased from 3% in 2019 to 16% in 2020.

Ecosystem services, such as water purification, crop pollination, flood protection and carbon sequestration are vital to society and to economy. These services rely on the conservation, sustainable use and restoration of biodiversity which is essential for human health, food and water security and climate change mitigation and adaptation[1]. At the same time, human activities negatively affect the biodiversity. According to the most comprehensive report on biodiversity assembled so far in 2019, some one million animals and plant species are facing extinction[2] and biodiversity loss is already costing the global economy 10 percent of its output each year[3].

Biodiversity initiatives for financial institutions

The momentum for biodiversity is growing amongst financial institutions, and so is the number of communities, networks and initiatives dedicated to this topic. Examples include Finance@Biodiversity Community, Finance for Biodiversity Pledge and Foundation and Partnership for Biodiversity Accounting Financials (PBAF)[4].

The Cambridge Institute for Sustainability Leadership has developed a framework which can help investors understand and assess portfolio dependencies on nature loss and identify different types of nature-related risks, their causes, their impact on companies, and their resulting financial risks[6].

Data is key to unlocking finance sector action on biodiversity loss, however, the quality of these data is currently rather low.

This is due to the lack of solid data from the companies that are not measuring their biodiversity footprint, the complexity of measurement methods, etc.

Although limited, the information which is currently available can already provide interesting insights to investors that allow them to identify risks and decide which companies to engage on. Different tools have been developed for financial institutions to understand the biodiversity risks and opportunities of their investments, such as CBF (Corporate Biodiversity Footprint), BFFI (Biodiversity Footprint Financial Institutions), STAR (Species Threat Abatement and Restoration)

GBSFI (Global Biodiversity Score for Financial Institutions), BIA (Biodiversity Impact Analytics) and ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure). These tools can help investors prevent and account for the negative impacts on nature, while directing investments to better outcomes for people and planet[11].

Most private equity investors still need to start applying the tools that can help them identify the exposure of their portfolios to risks related to biodiversity loss. Joining industry initiative(s) that are aligned with their resources, biodiversity ambitions and investment approaches might be a good way to start. Less than one-fifth of private equity fund managers in our ESG engagement program have included biodiversity in the ESG issues of their concern. Only one manager is measuring and reporting on the biodiversity impacts of its portfolio companies and demonstrate leadership in this respect (see case study).

Biodiversity impact measurement in private equity

Summa Equity introduced the tracking of negative externalities in terms of impact on SDG 14 (Life Below Water) and SDG 15 (Life on Land) to complement the existing tracking of climate impact (SDG 13) in its Portfolio Report for 2018. Summa reports PDF.m2.Year as an indicator of its portfolio companies’ ecological degradation and displacement footprint. The indicator has the following three dimensions:

• Potentially disappeared fractions of species (PDF): This is a measure between 0 to 1 indicating the share of biodiversity displaced in a particular ecosystem (e.g. a PDF of 0.5 would mean that half of all species would be lost)

• m2: The number of square meters that have been affected by biodiversity loss

• Year: A measure of how long that amount of biodiversity has been displaced from an area

Ecological impact of Summa’s portfolio companies is calculated in a similar way as Scope 3 greenhouse gas emissions, namely by applying emission factors to data on how much is spent on suppliers in different sectors. Unlike the climate impact calculations, PDF.m2.year is based on emissions of substances other than greenhouse gases that lead to various harmful effects like acidification or ecotoxicity.

Source: Summa Equity Portfolio Report 2020