Private equity

We are pleased to report that 58% of the private equity portfolio is invested in funds that are acting to avoid harm. A further 7% of the portfolio is invested in funds that are benefitting stakeholders and even contributing to environmental and social solutions. We also note that 36% of the portfolio is invested in funds that “may or does cause harm category,” according to our IMPinspired methodology. See Figure 21.

The private equity portfolio indirectly invests in about 500 companies, each of which has an impact on the world and society. We strive to embed the best RI integration we can to understand whether that impact is positive or negative, though there are many complexities in the private equity space such as data collection issues, inconsistency in reporting standards, and the size of managers and the companies they invest in being too small for them to warrant large amounts of dedicated resources to investigate. In this way, using the IMP framework has its limitations in the lower-mid market private equity space since many funds cannot either prove or disprove their impact potential on the world (and so we take the conservative assumption that they may be harmful).

In this asset class, the priority is therefore to increase ESG and RI integration before we can assess impact. In 2023, we sought to increase the coverage of the portfolio assessed using our RI Scorecard to 100%. We also aimed for all new funds to be PRI signatories (currently about 70% are), to have a minimum RI Scorecard assessment score, to all have RI policies and ESG reporting in place, and finally to initiate an “improve or leave” plan for any funds or managers with a sub-par RI assessment score. With these measures in place, we expect to have a better understanding of the portfolio when it comes to ESG integration so we can understand and manage sustainability risks and opportunities, engage with managers on improvements, and communicate the sustainability performance of our clients’ investments more concretely. We think that this top-down, holistic view complements a deep and thorough understanding of the managers and company holdings in the portfolio from the bottom up.

Importantly, the private equity portfolio mainly invests in funds that are acting to avoid harm. For example, more traditional buy-and-build managers that focus on optimising the operations of small and medium-sized companies in their preferred sector and region. We strive to engage with these managers to improve their ESG integration and reporting using our RI Scorecard and at times will exercise our side letter exclusions so we do not participate in deals that go against Anthos’ exclusions policy.

For those funds that may be harmful according to the IMP framework, one example is a fund that seeks to leverage AI, digital transformation, and human capital to accelerate growth and create long-term value. Some example companies include insurance services and human capital software platforms. Using our RI Scorecard, this manager classifies as a novice in terms of policy rating, ESG integration, DEI, and climate change though it is a professional with active ownership. We have used these results to engage with the manager and learn more about some of the issues at hand. After investigation, it’s clear they implement ESG in innovative ways, such as eliminating bias in the hiring process, or understanding the energy required for AI and mitigating with specific models to consumer less energy. We continue to engage with the manager on these topics and use the knowledge to better understand how to assess and address ESG issues across the private equity portfolio.

Ultimately, these things together show our strategy in action: we are building diversified portfolios with managers who do different things and who do them well. A robust RI integration framework to analyse and assess these managers consistently and possibly learn new insights that can help engage managers to improve their practices is useful. Having a deep and active involvement with each underlying manager in our portfolios and understanding the portfolio companies’ business models and how different ESG issues might impact them and vice versa their impact on the world is vital.

We are pleased to note that the overall average RI score is improving from year to year. Coupling this with strong financial results, we think this shows that it is possible to invest in a diversified private equity portfolio with strong RI credentials.