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Retail is PE’s major ESG trouble hotspot

by The Drawdown 3 September 2018

Retail, aerospace and defence, personal goods and financial services remain the investment sectors most likely to trigger negative ESG coverage, according to new analysis by asset manager Robeco.

More than 80% of the 1,139 portfolio companies the firm screened through intelligence provider RepRisk were found to face low reputational risk levels as of March 2018, with the remainder classified as moderately at risk.

Industries including food and beverage, travel and leisure, software, oil and gas, banking and chemicals proved comparatively controversy-free. However, violation of national legislation, supply chain troubles, fraud and other governance issues meant the retail and personal and household goods sectors topped Robeco’s negative coverage ranking; they were also held back by social issues including employment conditions and human rights abuses.

Robeco, which has selected private equity GPs on behalf of clients since 2000, commented on some of the individual cases it brought to the attention of industry managers. The situations ranged from a portfolio company criticised by an NGO over opacity on refugee workers to the alleged falsification of accounts, and claims – reportedly debunked later – of the sale of beauty products containing harmful ingredients.

All eyes on the supply chain
Give its typically long-term, controlling ownership approach, private equity is often singled out as an industry able to drive positive change with supply chains and human rights. Robeco described the “dialogue” it has maintained with ESG professionals (45% of all interactions), their IR counterparts (27%) and deal partners (23%) working to shed light on these issues.

Pure online retailers aside, most players in the apparel sector and their GP backers remain “extremely aware” of the human rights and labour issues pervading global supply chains, Robeco said. The firm’s own discussions with GPs showed many – less so venture capital houses – are engaging with businesses to tackle challenges such as workforce record-keeping and sub-contractor screening. Suppliers are being audited by specialist NGOs and other third parties to spot issues and put remediation plans in place, Robeco added.

The Drawdown has explored private equity’s budding efforts to offer citizens data on its economic, social and environmental impacts. Robeco’s analysis found 78% of the GPs in its ESG programme have yet to adopt a framework – the UN’s sustainable development goals or otherwise – to report their footprint. The lack of quantitative, comparable data and the absence of third-party verification are among the key challenges of impact reporting, Robeco said.

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