While the integration of environmental, social and governance factors is becoming more prevalent in discussions about institutional investing, there’s more work to do when it comes to alternative investments.

“Private equity is all about value creation,” said Martha Tredgett, Canadian representative for LGT Capital Partners Ltd., during an event hosted by the Canadian chapter of the Responsible Investment Association in Toronto on Monday. Incorporating environmental, social and governance factors into her firm’s analysis of viable private equity investments is one way of reaching that objective of adding value, she said.

In fact, private equity is an asset class in which a firm can make its voice heard in regards to sustainability factors more easily than with others, she said. “We want to manage risks, so we want to manage ESG risks as well. And a lot of them have been hidden and not at the forefront.”

Read: Japan a hotbed of ESG activity

Tredgett noted the profile of those interested in taking on private equity allocations is more conducive to the long-term, active ownership needed to engage on such issues. “The ball is really in your court as a private equity investor,” she said.

When getting down to the company level, “it’s all about the data and what you do with the data,” she added.

She gave the example of one European retailer with roughly 1,800 stores and about 12 factories in Myanmar. It came to light that there were workers in those operations who were under the legal working age of 16 in that country. Engagement from the company’s investment partners resulted in a swift response from executives who followed through on a plan to help the underage workers, many of whom had been using falsified identification to pretend to be older, to stop working.

Read: Is gun control the next big ESG issue for institutional investors?

The company addressed the issue by giving the workers the wages they would have earned between then and the time they turned 16, while simultaneously encouraging them to pursue education in the meantime. The company also promised the workers their jobs would be there for them to come back to once they were of legal age.

When it comes to infrastructure and real estate, there are similar but varying considerations, said Francisca Quinn, founder and managing partner at Quinn & Partners Inc. “You can’t manage what you don’t measure,” she told the audience, noting that in performing due diligence on a potential investment, prospective financiers should understand which environmental, social and governance issues play into the management of a particular asset, whether it’s a pipeline, a railroad or a port. If an investor doesn’t understand what the issues might be, it’s impossible to then engage on them, she noted.

As for real estate, the room for improvement present in many buildings, regardless of their function, could represent a significant value opportunity for investors, said Quinn. If an investor has already established a screening process to identify potential areas for improvement, the search for opportunities in that vein becomes easier, she noted.

Read: Global investors turn to infrastructure, real estate as interest rates normalize: report

“You can take a, say, very inefficient building and you can find investors and asset managers that actually specialize in finding assets that aren’t performing to the highest level, and the value-added strategy is to deploy capital in that environment and make improvements,” said Quinn.

Credit is another area of increasing interest that represents more of a challenge when trying to screen for environmental, social and governance issues in comparison to an alternative like private equity, said Liam O’Sullivan, principal and head of client portfolio management at RP Investment Adivsors.

When looking to invest in corporate bonds or other types of company-specific credit, finding the information required to make a thorough evaluation on such factors presents a problem, he said. Rather than collaborating, as a private equity investor might, those purchasing debt from a corporate entity hold less clout than more straightforward shareholders, he said. As such, getting information to understand the environmental, social and governance implications of investing requires a lot of energy.

Read: PSP Investments buys Quebec wind power project, B.C. real estate portfolio

“It can be as creative as tracking down company executives at conferences,” he said.

Also, because of how short their investment time horizon can be, it can be hard to assess such issues in the short period available. Given that, O’Sullivan noted the need to gather information efficiently. Just one question can gather more valuable information than another, he noted. For example, asking about the percentage of women on a company’s board can give richer information than asking whether it has any women on it at all.

His firm has narrowed down its process to 15 data points on environmental, social and governance themes, which allows it to quickly identify areas of needed improvement. When it’s easier to spot a problematic trend, it becomes more obvious to know when and where to do a deeper dive. With such a system in place, if a problem with an investment becomes obvious, managers have to act as they would with any other sort of investment risk, said O’Sullivan.

“It forces you to engage with the companies you’re invested in.”

Read: Canadian pension funds increasingly using co-investments to diversity real estate holdings

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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