Private Equity

Stafford’s Private Equity programs aims to provide investors diversified access to high quality managers as well as direct investments in the private equity space through a combination of primary and secondary fund commitments, and co-investments. Stafford is a pioneer in private equity sustainability investing and one of the first investors to systematically engage with private equity fund managers on their ESG integration policies and practices. We launched our first sustainability focused private equity product in 2004 and have made primary and secondary commitments to more than 75 different private equity funds active in the sustainability space since then. We have also made dozens of co-investments into sustainability-focused and other companies alongside our fund managers (see case study).

Stafford Private Equity in a nutshell*

2000

Launch year

USD 3.1bn

Assets under management

50

Global PE programs under management/ advice

240+

GP relationships since inception

*Data as of December 31, 2021.

Monitoring of private equity fund managers ESG efforts

Distribution of private equity fund managers' star ratings for responsible investment and stewardship policy (ISP) and integration in PE investment process (PE)

Source: fund managers, PRI, Stafford Capital Partners; scores as of 03/08/2022, based on December 31, 2020, data.

Our ESG monitoring and engagement with private equity fund managers is largely based on the insights from our annual ESG manager survey. Engagement can also be initiated by ESG-related incidents in the underlying portfolio companies which we are monitoring on a continuous basis. Assessment of managers’ responses to the ESG survey provides an indication of managers’ ESG performance and a valuable input for a dialogue on how their ESG programs can be improved.

Our last ESG survey has been conducted through the updated PRI reporting and assessment tool in 2021. Just above half of 64 private equity fund managers who responded to the survey are signatory to the UN PRI. Fund managers’ responses were assessed and scored, and their scores then ‘translated’ into star ratings.1 The distribution of scores which are presented in the figure below.2 A five-star rating reflects best ESG practices in the investment management industry while one star suggests very early stage of ESG integration.

The distribution of fund managers’ ratings suggests substantial differences in the level of ESG integration in private equity and venture capital, both in terms of policies and their implementation. In our portfolios we find a wide variety of mangers in this respect, from beginners to the absolute leaders. The comparison between the ratings across ISP and PE modules indicates that fund managers
seem to have difficulties formalizing what they do in policies and
ESG disclosures, but they actually perform the ESG work in different
stages of their investment process.

We see an opportunity in the engagement with the group of managers that are still at the beginning of their ESG integration. Using our knowledge and experience we provide managers with the feedback and recommendations on their assessment results and have a dialogue on how they can develop their ESG frameworks further.

 

[1] The star ratings are assigned based on the percentage scores across managers of all sectors as follows:

Percentage thresholds Number of Stars
0 ≤ 25% 1
> 25 ≤ 40% 2
> 40 ≤ 65% 3
> 65 ≤ 90% 4
> 90 ≤ 100% 5

[2] Stafford used the PRI’s 2021 survey and assessment methodology. Managers are assessed on multiple indicators that are related to their responsible investment policy, strategy, governance, stewardship, climate change and transparency (ISP score). Furthermore, indicators of how advanced they are in the integration of ESG considerations in different stages of their investment process are being incorporated in the so-called PE (module) score. scores range between 0% to 100% and is transformed in the star rating. Details on the PRI’s 2021 assessment methodology can be found here: https://dwtyzx6upklss.cloudfront.net/Uploads/v/g/y/2021_assessmentmethodology_jan_2021_403875.pdf

Engagement with private equity fund managers

ESG engagement with fund managers represents our key active ownership activity in private equity. Annual ESG survey serves as a vital source of insights which we incorporate in discussions with the managers. Once the assessment results have been calculated, we prepare feedback and recommendations which we then discuss with the managers. Our engagement efforts focus on the managers that have not yet been able to implement good ESG practices, as we believe we can add most value there. Following our 2021 ESG survey we have had more than 30 ESG sessions with PE managers in which we have discussed their ESG results, plans and improvements. See the box for the summary of these insights.

 

Insights from 2021/2022 ESG engagement sessions

  • A number of PE managers plan to upgrade their policies and add new elements in their ESG due diligence, such as carbon emissions and contribution to SDGs.

  • Many managers have hired or plan to hire dedicated ESG specialists and engage external consultants to help them deal with the ESG-related regulation and disclosures.

  • An increased focus on setting and tracking impact KPIs has been noted.

  • Climate change and diversity related KPIs have gained in importance.

  • Managers who have been tracking ESG or impact related KPIs for years but have not included them in their quarterly/annual reports yet, plan to report more in the coming years.

  • Managers have emphasized the increased demand for ESG-related data from their LPs in general.

  • European PE managers have ramped up their monitoring and reporting systems in response to the EU SFDR regulation.

Status of ESG, SDG and impact reporting in private equity

Stafford’s Private Equity team has been tracking disclosures of SDG contribution of private equity funds since 2016. Our latest analysis of the impact reports provided by private equity funds in our engagement program for 2021 suggests that the trends we have identified in the past persist. The proportion of managers who provide disclosures on the positive impact of their investments keeps increasing and impact data remains mostly reported at the fund level.

 

ESG and impact reporting by GPs in Stafford’s private equity ESG engagement program, 2019-2021

Source: Stafford Capital Partners, based on reports by private equity fund managers; data as of December 31, 2021.

SDG reporting

The number of fund managers that map their portfolio companies to the relevant SDGs has been increasing consistently for years. While it was mostly the impact- and sustainability-focused funds that were providing impact reporting initially, other managers followed. In many cases portfolio companies are still only loosely linked to the SDGs, without impact KPIs that are related to their core business. Only about 40% of managers in our ESG engagement program provide quantitative data for the relevant SDGs. The table illustrates the indicators for positive contribution of portfolio companies to the SDGs that are most commonly provided by private equity managers in their reports to investors.

Private equity and venture capital managers’ impact disclosures continue to differ significantly in terms of data granularity, impact methodologies applied, units of measurement and reported periods. As some fund managers do not disclose the same impact indicators for their portfolio companies each year, missing data represents an important challenge. This might be due to companies being exited, companies not being able to provide data, or other reasons. Furthermore, data is self-reported and typically not validated by relevant third parties. All this makes aggregation of ESG, SDG and impact data across companies and funds very challenging, if not impossible.

SDG-related indicators reported by private equity fund managers in Stafford’s ESG engagement program for calendar years 2019-2021

Source: Stafford Capital Partners, based on December 31, 2021, data from reports by private equity fund managers.

Reporting on CO2 emissions

According to our 2021 ESG survey, only 23% PE and VC managers publicly supported TCFD recommendations on climate disclosures. If we look at their actual disclosures, it can be noted that just over one-third of the managers in our ESG engagement program currently provide information on GHG/CO2 emissions. This percentage is still low but slowly improves every year. The quality and the granularity of emissions data will improve as the disclosure regulation fully kicks in in the EU, the UK and other geographies. Consequently, we expect the sustainability-focused managers, who typically only report GHG/CO2 emissions abated due to their portfolio companies’ products or services, to start reporting emissions from the companies’ operations as well. We also note that the proportion of fund managers who estimate GHG emissions from their own operations, increases every year.

 

CO2-related disclosures by PE managers in reporting years 2019-2021

Source: Stafford Capital Partners, based on December 31, 2021, data from reports by private equity fund managers.

Climate change tools & guidance for private equity managers

Climate change and related disclosures remain high on the investor agenda and subject to increased regulation in many geographies. Several guidance documents and tools, applicable to private equity fund managers have been released in the last year. We list some of them below.

  • Invest Europe Climate Change Guide provides tailored guidance, practical tools and concrete business cases made by practitioners for practitioners to help them navigate the increasingly complex ESG and climate landscape.

  • Science Based Targets for Private Equity was released by the Science Based Targets initiative at COP26 to enable wide adoption of science-based targets (SBTs) by private equity investors and further climate action in the finance sector.

  • Greenhouse Gas Accounting and Reporting for The Private Equity Sector has been developed by the Initiative Climat International (iCI) with ERM and enables GPs to establish processes for carbon footprint data collection and improve the quality of their GHG emissions reporting.

  • TCFD Guidance on Metrics, Targets, and Transition Plans were prepared by the Task force on Climate-related Financial Disclosures (TCFD) to support organizations in disclosing metrics, targets, and transition plan information and enable users to appropriately assess their climate-related risks.

Nutra Organics

 Case study

Nutra Organics is a portfolio company in one of Stafford’s Australian mandates which aims to build a portfolio of high-quality Australian co-investments alongside managers with exceptional track records. An Australian private equity firm Fortitude Investment Partners (‘FIP’) acquired Nutra Organics in December 2021 and Stafford made a co-investment commitment alongside FIP.

Nutra Organics is a well-established Australian brand of health and wellbeing products which is known for its bone broth, collagen powder and superfoods products. Founded in Australia in 1998 by Mark and Darlene Powell the Company has grown to a diversified wellness group focusing on food, beverage and skincare.

The company is environmentally conscious and is focused on sustainability. Nutra Organics uses organic and local ethically sourced ingredients wherever possible. It has almost completed its transition to fully sustainable packaging and now uses primarily plastic-free recyclable canisters, 100% compostable snack bar wrapping, recycled cardboard shipping boxes and compostable mailers. Nutra’s warehouse
operates paper-free and uses carbon neutral couriers.

In addition, Nutra Organics is a strong supporter of non-profit organisations that focus on sustainability, such as Carbon Neutral Charitable Fund, Clean Ocean Foundation, OzHarvest and Australian Bushfire relief services. Nutra Organics corresponds strongly to the SDG 12 – Ensure sustainable consumption and production patterns (12.2 and 12.5).