A regular briefing for the alternative asset management industry.
Proliferation of policies has become a fact of corporate life. Designed to mitigate a wide range of identified risks, company policies are now virtually compulsory for even the smallest business. Indeed, in a private equity-backed company, the investor-nominated directors would be well advised to ensure that any potentially significant liabilities are covered by a comprehensive policy. Data protection, competition law, health and safety, climate change and anti-corruption are some of the most common examples, but every company should carry out its own risk assessment and respond accordingly.
That's a good thing, of course. Countless workplace accidents and environmental catastrophes have been avoided by adherence to a well-designed policy. But it is also obvious that establishing a policy is only the start: ensuring that it is regularly reviewed, and applied consistently, is just as important as having the policy in the first place.
That principle – that a flawed or ignored policy can be worse than no policy – also applies to a private fund manager, and a recent UK Supreme Court case should serve as a timely reminder that taking responsibility for sustainability issues across the portfolio should be approached with care.
The reminder is timely because it is now virtually impossible to raise a European private capital fund without an ESG ("environmental, social and governance") policy, and due diligence questions will also probe a firm's approach to responsible investment. In fact, recent EU reforms now require an asset manager (including a private equity firm) that is regulated in the EU, or accessing EU-based investors, to disclose its approach to sustainability risk, and firms that make claims about the environmental or social characteristics of their product will be required to report annually on how they have measured up. The pressure to talk positively about ESG is definitely increasing, and many firms are busy beefing up their disclosures.
...But there are real dangers for firms that fail to put enough substance behind the claims that they make...