Despite challenges, such as balancing ESG enhancements in portfolio companies with the return horizon during our ownership period, Roc Partners remains committed to integrating ESG into valuations and driving value creation across its portfolio.
Michael Lukin: Over the past 12 months, Roc Partners has achieved a lot in terms of responsible investment led by both of you. Sam, can you give us some examples of some of the work you've completed both at a Roc Partners organisational level and at a portfolio company level?
Sam Bayes: Absolutely, Mike. It's been a very big year for us. Starting at the Roc organisation level, we developed our inaugural ESG strategy and that was developed with Fiona Reynolds, our Advisory Board member and endorsed by Roc Partners managing partners.
It's also the second year we developed our UNPRI transparency report. This year's report will actually be made publicly available on our website.
We also rolled out an ESG reporting system, a digital reporting system, so no more Excel spreadsheets, hopefully, for our direct investment portfolio.
We are using a climate risk professor to help us with managing climate related risks and opportunities across our agriculture investment portfolio. And this renowned climate scientist actually provided two education and training sessions for Roc's investment team.
And on the topic of training, we actually completed 14 ESG related training sessions across various different topics; Health and safety, climate change, modern slavery, the new ASRS reporting requirements.
And we also started to develop our Roc Partners impact investing framework, which I'm hoping will be a key topic in next year's report and video.
And if we move across to our investment portfolio, we completed ESG due diligence across 100% of our direct and multi-strategy investments.
We've also actually now outsourced ESG due diligence to a third-party service provider really just to enhance the assessment approach across the due diligence process. And we also trialing that outsourcing from multi-strategy investment portfolio. So that will allow Jen and I more time to spend on engagement and stewardship across our multi-strategy investments.
Michael Lukin: That's an amazing amount of work you two have got through in the past year.
And as I reflect on the last year, I think one thing you perhaps haven't mentioned is our industry collaboration here at Roc. And I think you're Co-chair personship of ESG committee at the Australian Investment Council and Anna Ellis sitting on our board, of AIC. And obviously I've joined the Champions to change program within AIC as well.
So I think, in addition to what you've done internally, I think as an industry participant, we've really helped with developing ESG more broadly through the private equity market.
And Jen, things don't always go to plan. It would have been some of the, I guess, key challenges you've faced over the last year in the responsible investment area.
Jenna Lindbeck: Yeah, you're absolutely right. And there are many challenges in our role. I think two that probably come to mind both as Roc as a responsible investor, but also that we observe within the market more broadly.
If I think about the first challenge that we face, there is an inherent constraint at times being a private equity investor. And the hold period we have say, for a three-to-five-year investment, with some of the large CapEx and ESG projects and achieving the returns and payback across our ownership horizon.
And so when I think about that may be a great example to talk about is decarbonization.
So for some of our investment portfolio companies that have significant decarbonization trajectories ahead of them, the CapEx outlay can be significant and across a three to five year time period that return horizon can sometimes be misaligned with our ownership.
And I think whilst we see a lot of value in laying the foundations for that transition strategy, there can be challenges in reconciling our goal to maximise short term returns with the longer investment horizon or CapEx outlaying return period for those significant decarbonization projects. I think that challenge is probably also compounded by the lack of clear and consistent ESG premium, unfortunately that haven't yet come to the forefront in the market yet.
So whilst we are looking to integrate ESG risks and opportunities into our valuations and financial analysis, that skillset is still very much in its infancy and is developing in the market. And whilst it's evolving and it's certainly being supported by regulations such as the ASRS that's recently been passed and we're getting more standardised consistent reporting across the market. It's still definitely a challenge to be able to build that analysis into our valuation methodologies and then see that clear and consistent ESG premium or multiple uplift on exit.
So hopefully a silver bullet is coming, but I think time will and it's just a challenge for now. But we inherently know that ESG drives value, whether it be expanding the bio universe, avoiding discount on exit, access to market, access to capital, access to customers.
We're just waiting for the quants to follow.
Michael Lukin: Premium to follow us. Yeah, thanks Jen that's great.