ESG implementation and reporting for private markets

Driving value within private markets requires a tailored approach that aligns to where a business is on their ESG journey. Sam Bayes and Michael Lukin discuss some of the frameworks have been developed to support the implementation and measurement of ESG into businesses as well as examples of how we have partnered with portfolio companies on ESG integration.

Andrew Muston: Hello, I'm Andrew Muston Head of Wholesale at Roc Partners. And today I'm joined by Michael Lukin Managing Partner, and Samantha Bayes Senior Associate. At Roc Partners we recently published our first report focusing on responsible investing. And today, we wanted to spend some time better understanding Roc’s approach to responsible investing and how that style of investing is influencing private markets and value creation. Sam, looking specifically at the private market landscape, are there key areas or policies that the industry is focused on right now? 

Sam Bayes: Absolutely. So similar to Roc Partners as an organisation, reporting is a key challenge for the industry and it has been for a really long time. So, there's a plethora of ESG reporting frameworks in the market and most of them have actually been developed for the public markets. And that's where the challenge comes in. So with public markets you can actually just withdraw capital for companies underperforming irrespective if that company has an ambition to improve.

Whereas with private markets as we know, we take a much more hands-on approach where we actually work with our companies to drive performance improvement, and as such the reporting frameworks that were created for the public markets aren't suitable for the private markets.

So the Institutional Limited Partners Association ILPA has actually tried to take a first step in addressing this challenge. So they have developed a reporting framework specifically for private markets known as the ESG data convergence initiative. So this was formed by leading global GPs and LPs. So 215 GPs and LPs came together to actually develop this framework. Roc Partners is one of them and this framework is essentially it's condensed into focus areas. Carbon emissions, renewable energy, health and safety, diversity, employee engagement. So really they've come up with key performance indicators that private companies can report on against these key focus areas. So I would say that reporting framework for private markets is particularly important and it will be interesting to see how reporting actually adapts to this framework for our responsible investment report. It’s the first year we've reported against the framework and it certainly had its challenges. 

The next key thing that the private markets have focused on is the Initiative for Climate International. So this is essentially a private markets institution that's come together to tackle climate change. Looking at how can private equity companies actually partner with their portfolio companies to decrease carbon emissions and drive the transition to a net zero economy. And what are the practical tools and steps that that actually involves. 

Off the back of that science-based targets. So this is a global initiative that's come together and it's actually developed guidelines and frameworks for the private markets. So if a private market player actually wants to set a science-based target, how can it do that? So it's the private market industry guidance was actually pretty late kind of coming to the party if we look at other industries and sectors.

And then another key one to look at is actually the Australian Investment Council. They are trying to bring all the changes that are happening into the industry. So they've established what's called the AIC ESG committee. There are six members that are part of that committee. Roc Partners is part of that which is very exciting. And really what we trying to do is develop guidance and frameworks for GPs on how they can integrate and embed ESG within their processes and really looking at the learnings of what are LPs expecting from GPS and the standards that they want to stop hold and how can we provide that guidance for all GPS, no matter where they're at on their maturity journey. 

So if they super nascent, they don't have an ESG policy. How can they tackle that and then those that are but further along the journey that I actually talking about transition risk, transition plans, and setting zero targets. So there's a lot of work going on in the industry and a lot of noise, and your also seeing a lot of industry players actually coming together. So you seeing the likes of RIAA and the IGCC and the AIC all actually coming together and recognising that this is a problem that actually needs industry involvement and collaboration.

Andrew Muston: Fantastic sounds all very encouraging. Now pivoting back to you Mike, Roc partners are specialist in several sectors. How do the industry priorities that Sam mentioned impact or changed way Roc approaches partnering with portfolio companies? 

Mike Lukin: Yeah, no great question Andrew and I think you know following on from Sam's comments earlier. Our focus is very specific to the portfolio company. So what we tend to find is each portfolio company has different initiatives that they can work on thro