Integrating ESG into the Investment Process

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Written by VentureXchange

January 10, 2020

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Responsible investment is on the agenda for many LPs and GPs and is recognizable as a requirement rather than a differentiator. Integrating ESG into the investment process has become important for all stages of the process.

European supervisory authorities consider risks related to environmental, social and governance (ESG) factors. Therefore, they provide guidance on the investment decision-making process.

ESG investment policy statement processes and procedures focus on non-financial performance indicators. Such places a company’s approach towards responsible investment, sustainability and its impact on society and the environment.

Additionally, that involves other ethical and corporate governance considerations.

Besides, it has become necessary to incorporate ESG concerns into all stages of the investment process. Our recommendation is to improve it by creating a robust governance structure.

According to ESMA, financial institutions have a stewardship role in ensuring a gradual transition to a more sustainable economy. Finally, this will ensure contributing to avoid any potential financial stability implications. In the Joint Committee Report, financial institutions will incorporate ESG factors in their investment decisions as well as through engagement.

Too, they should consider the economic actors via their business activities investment, lending and insuring). Furthermore, they have to reflect the use of ESG risk-based underwriting and pricing practices.

Creating the ESG Investment process

Integrating ESG into the investment process is more important now than ever. Also, a rising number of investment funds are considering the implementation of the ESG policy into their entire investment process. By implementing the ESG policy they seek to consider environmental, public health, safety, and social issues.

These are associated with target companies when evaluating whether to invest in a company or entity. During the period of ownership, it is also recommended to consider evaluating. Further, they want the companies in which they invest, to grow and improve for long-term sustainability. Besides,they want to benefit multiple stakeholders, including on ESG issues.

A great number of investment funds have entered an exciting era of ESG. Accordingly, they are focused on driving revenue and positive impact through each investment. All hope to contribute to this goal by creating resilient business strategies and leadership approaches.

Apart from that, exploring the shaping of market opportunities around impact. Furthermore, they tend to influence the flow of capital for good. Both the investment funds and portfolio companies must redouble their efforts to encourage ESG investment policy. Investment funds play a valuable role in advancing solutions to challenges of climate change, human health, education and many others.

It is a perfect time for investment funds to recognize they have the power for a positive impact. Moreover, to use the talents of their people and capital in partnership with their investors. Thus, investors should recognize the knowledge and experience of their portfolio companies to address the ESG challenges.

Tips for implementing the ESG investment policy

It is crucial to recognize environmental, public health, safety, and social issues. These are all associated with target companies when evaluating whether to invest in a particular company or entity.

During the period of ownership, it is highly recommended to continue evaluating.

Be accessible to, and engage with, relevant stakeholders either directly or through representatives of portfolio companies, as appropriate.

You should see to grow and improve the companies in which you invest for long-term sustainability. Primarily to benefit multiple stakeholders, including environmental, social, and governance issues.

Use governance structures that provide appropriate levels of overlooking in areas of audit, risk management, and potential conflicts of interest. Try to implement compensation and other policies that align the interests of owners and management.

Support the payment of competitive wages and benefits to employees.

Provide a safe and healthy workplace in conformance with national and local law.

Encourage strict policies that prohibit bribery and other improper payments to public officials consistent with the OECD
Anti-Bribery Convention.

Respect the human rights of those affected by your investment activities. Also, seek to confirm that you do not invest in companies that utilize child or forced labour or maintain discriminatory policies.

Give timely information to your limited partners on the matters addressed herein. Also, work to foster transparency about your activities.

Lastly, our advice to you is reassuring your portfolio companies to advance these same principles. Therefore, you need to do this in a way that is consistent with their fiduciary duties.

Summary

There is no doubt that there is an increasing number of ESG investment options available to investors. However, investors face some technical and operational challenges in the implementation of ESG into the investment process.

Further analysis of the ESG models by the industry could help tackle the ESG risks. Therefore, an in-depth analysis of ESG investment model could be beneficial for your business. Further, contribute to the prudential and behavioural standards required of investors.

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