LGT Capital Partners, a partner of Initiative & Finance, manages investments on an international scale. A pioneer in the field, the firm has addressed ESG issues through its funds for over 20 years. Pauline Wetter, investment director private equity at LGT, gives us the low-down.
What are your current ESG priorities, both as a firm and as an investor?
We aspire to be a world leader at integrating ESG principles into the private equity ecosystem, with the goal of combining financial returns with a positive contribution to the environment and society as a whole. We work to achieve this vision around three key themes: “Invest”, “Promote” and “Live”.
In terms of investing, LGT Capital Partners concentrates firstly on the due diligence process we’ve put in place for all the investments we make. In practice, this means keeping up an ongoing dialogue with the fund managers we support: they give us ideas, and we give them the insights we obtain from the market in which we operate.
To promote these values, we are actively involved in a number of ESG-focused professional bodies, such as UNPRI, the IIGCC (Institutional Investors Group on Climate Change) and the Global Impact Investor Network (GIIN). We thus support the development of better market practices and encourage greater integration of ESG into our industry.
Our third pillar, “Live”, is about implementing ESG principles on a daily basis at LGT Capital Partners as an organisation, especially through access to continuous training, a commitment to staff diversity, and inclusiveness towards people from all backgrounds.
How do you factor sustainability issues into your investment strategy – risks, future-proofing, opportunities, etc.?
We believe that companies that properly manage the relevant ESG matters are better equipped to prosper in the future and therefore offer a better risk-reward profile. At the same time, many sustainability challenges offer opportunities for innovative businesses, and thus for investors, too. Our investment strategy is based on several key pillars that serve to minimise risk while taking advantage of these opportunities. The first is the due diligence we perform before each investment in order to fully understand how fund managers take ESG matters into account and factor them into their strategy. The second pillar is the regular discussion of progress that we keep up throughout the relationship with each manager. This can take the form of dialogue, or specific reporting. Each year, we also share our insights on matters such as market best practice with all our fund managers in an ESG report of about 50 pages.
The third key focus area is based on a rating system for all the managers we support, which involves sending them an annual questionnaire with a number of questions derived from the UNPRI questionnaire. We use this to assign a score from 1 (excellent) to 4, which allows us to track how their actions on their ESG priorities change over time.
This ESG rating is a crucial tool for measuring on a broader scale how managers progress on ESG criteria as a whole, especially by region and by segment.
More specifically, we also manage an impact fund devoted to managers and assets that offer solutions to the most urgent sustainability issues, as expressed in the UN Sustainable Development Goals (SDGs).
How are you staff organised internally to work on these topics?
We have a dedicated ESG team for private markets. Every member of the investment team also receives ongoing training on how to bring ESG criteria into consideration via the pillars I referred to earlier on. In addition, all staff members share ideas regularly, for the sake of continuous improvement and to keep themselves at the forefront of all ESG advances. Our overall ESG strategy is set and overseen by our ESG committee, but to stay agile, we have a number of smaller in-house groups focused on specific topics, such ESG in private markets and ESG for our business, as well as thematic groups on climate change and diversity & inclusiveness. We also have regional managers for the US, Asia, Europe etc.
Can you tell us a bit more about your “ESG Cockpit”? What main criteria do you use to make your investment choices?
LGT Capital Partners has numerous activities in the management of multi-option products. Our ESG Cockpit is a proprietary tool that uses publicly available ESG data to generate ESG scores for listed stocks. It analyses the ESG features of a company’s activities, potential ESG controversies and the impact of the company’s products on the Sustainable Development Goals. The Cockpit allows us to work out the carbon footprint of a listed stock or an entire portfolio.
To obtain an overall view of our activities, we feed part of our private equity scoring system I mentioned earlier into the ESG Cockpit, so that we can understand how our private equity investments fare in terms of, for instance, their carbon footprint or their contribution to the Sustainable Development Goals.
ESG regulation is rapidly evolving and increasingly stringent. How are changes such as the SFDR and PAIs affecting your ESG practices?
We like these regulatory changes because they make the ESG approach more clearly defined. At LGT Capital Partners, we are pioneers in this field: we first began including ESG clauses in our funds back in 2003. We have been members of the UNPRI association since 2008 and have a seat on its board. It therefore matters to us that regulation evolves. We’re ready for it. Regulation merely confirms the issues that we are already addressing informally.
Previously, there were a lot of processes and checklists. What regulation has changed is the way in which we quantify certain results, which is making the whole industry converge towards something very tangible. This is great, but at the same time, regulation in Europe is a rapidly evolving, moving target. That does present certain challenges. But we think we are well equipped to meet them.
Launching funds such as Initiative & Finance’s Tomorrow Fund has become something of a must for private equity firms. How does the Tomorrow Fund stand out among all the other funds on the market?
The impact investing market is still in its infancy. “Impact” is a trendy term, and people use it even if they don’t always have any real underlying approach. It can give you extra traction in a fundraising – if you push it a little. What clearly sets Initiative & Finance apart in this regard is an approach that quantifies all the targets throughout the entire investment process. First of all, there’s an operational approach at the sourcing stage, i.e. talking to the manager of the business for sale so that you can first quantify the targets and then quantify the progress made towards them. That way, by the time of the exit, businesses are sustainably transformed in a highly visible way.
Both investors and businesses now have genuine sustainability convictions. And as climate change becomes ever more visible, resilience is taken into account financially in the valuations. It’s a real virtuous circle!