Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on March 20, 2023 - March 26, 2023

Private equity (PE) firms are increasingly requiring their portfolio companies to adopt environmental, social and governance (ESG) practices, even though private firms are not currently mandated to do so by regulators. Progress is still slow, however, says Sachin Goel, executive director and head of Creador Multiplies Good & Growth (CxG) at Creador Sdn Bhd.

Last year, the local PE firm formed the CxG team, a dedicated ESG team to ensure its portfolio companies have incorporated or are planning to integrate ESG into their operations. This makes Creador one of the first PE firms in the country to have such a focus on ESG in this space.

Creador invests in high-growth businesses primarily in South Asia and the Southeast Asia region. It focuses on investing in mid-sized companies, and small and medium enterprises (SMEs) across these markets.

Creador’s portfolio companies include listed firms (such as MR DIY Group (M) Bhd and CTOS Digital Bhd) and private firms (BIG Pharmacy Healthcare Sdn Bhd and Loob Holding Sdn Bhd [founder of the Tealive bubble tea brand]).

“We created the vertical within Creador and have an excellent adviser, who’s an expert on ESG, to guide us. We started embedding the ESG mindset in Creador first and then cascaded that across our 21 portfolio companies,” says Sachin.

CxG came up with a three-tiered approach: The first is setting the foundation for ESG, followed by implementation and, finally, measurement and reporting.

“To set the foundation, we got an external party to come in and validate the portfolio companies and their position with regard to ESG currently. As a starting point, the companies are given a set of survey questions and through the responses, we can determine the gaps and help curate an ESG plan pertinent to those gaps,” says Sachin.

In the second tier, which is the implementation stage, the firm introduces ESG initiatives and provides solutions for these companies.

One of Creador’s portfolio companies, says Sachin, transitioned into renewable energy and ensured 36% of its total energy usage is sourced from a combination of solar and wind energy. Integrating renewable energy is one of the most straightforward methods to decarbonise.

For the last tier, which is measurement and reporting, the company uses tools by BlackRock Inc to monitor investments. The portfolio companies have to report their ESG practices through BlackRock’s platform every quarter.

“The companies need to constantly update [the platform]. There are certain mandatory ESG key performance indicators that they would have to fulfil and track on the platform,” says Sachin.

Grappling with challenges

Regardless of industry, it is no easy feat to introduce something new that will disrupt operations that have been run conventionally for years. The main challenge was to convince the portfolio companies to change their mindset and differentiate between corporate social responsibility (CSR) and ESG, observes Sachin.

“We went through onboarding and training programmes. We had 21 workshops across 21 companies, starting with onboarding the CEO and the management teams.”

During these training programmes, the CxG team explained the differences between CSR and ESG.

“CSR is philanthropic, but ESG is central to the business. Of course, part of it is that we are committed to enabling good returns for our investors, but it’s also about how you carry out your business practices and if it is sustainable for the people and the planet,” says Sachin.

Meanwhile, with the reporting frameworks and standards available, many companies are unsure as to which to follow when incorporating ESG practices.

“We adhere to two important accreditations. We joined the United Nations Global Compact as a participant and subscribe to the Principles for Responsible Investment. We also look closely at the Sustainability Accounting Standards Board (SASB) criteria,” he adds.

The SASB reporting standards consist of an ESG guidance framework that establishes requirements for the disclosure of financially significant sustainability information by companies to their investors. SASB standards track ESG issues and performances across 77 industries that cover a variety of quantitative metrics including greenhouse gas emissions, energy management and ecological impact.

Creador is in the process of preparing its own sustainability report, which will state its commitments and track its progress in these areas.

“We want the communities [company stakeholders, limited partners and the investment committee] to be well aware of what we are doing. And we want to share the good practices information through our online channels,” says Sachin.

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