For a long time in business and private equity, corporate sustainability – also known as ESG, the initials for Environmental, social and governance – was a rear guard part of the business that took front stage only when PR required.
That time has most definitely passed.
Today, ESG is not only front stage, but it’s often fully integrated into the deal making process – a central part of the business due diligence and on-going operations – as well as a key factor for LPs as they decide where to invest.
So what does ESG mean today? How involved in the portfolio companies’ sustainability strategies should the PE firms be? And how important is it to LPs?
That’s what I asked Adam Heltzer, Head of ESG & Sustainability at Partners Group, the global private markets investment manager with more than $91B in assets under management. Not only does Adam oversee ESG integration throughout the investment process, but he also manages a portfolio of 150 value creation and risk mitigation projects across some 70 direct investments in private equity, infrastructure, and real estate. Previously, among other roles, Adam worked as Global Leadership Fellow at the World Economic Forum.
Transcript: Adam Heltzer, Partners Group — ESG, Sustainability & Investing
Chris Riback: So, let’s start at the very top. What is corporate sustainability? It can mean different things to different people. How do you define it?
Adam Heltzer: Great question Chris, and I would hope to have the final, end-all, be-all answer for this, but there is no definition, so I’m just going to add my own definition into the mix.
Adam Heltzer: There’s no doubt about it as, as heard first here on this podcast. So for me, from my role here at Partners Group, when we think about corporate sustainability, really talking about those topics out of the wide universe of environmental, social, and governance topics that really are most relevant, and material to a given business.
So, this is not about butterflies and feel good stories. This is about those factors that really do affect a business, and how that business is proactively addressing those topics for the long-term success of it’s operation.
Chris Riback: And why is a corporate sustainability strategy meaningful then for a business? And I guess from your point of view, a portfolio business within a private equity portfolio, but also more broadly across a private equity portfolio. Why does it matter for the businesses themselves, and a portfolio?
Adam Heltzer: One clear hint as to why I think we think that it’s important is where I sit within Partners Group, instead of private equity firm. I’m part of the value creation team. So, you’re not going to find me within investor relations, or public affairs, you’re going to find me side by side with the folks who focus on sales excellence, procurement excellence.
So, we see better management of environmental, social, and governance topics as a way to create value, and also protect value, and very tangibly, what we’re talking about here is when you save energy consumption, you’re saving energy costs. When you reduce workplace injuries, you’re reducing worker’s compensation claims.
When you recruit, train your people better, you’re reducing the cost of turnover, things like that, and then on the risk mitigation, value protection side, of course we have tons of examples in the newspaper every week of poor governance, poor internal controls, poor data privacy, and protection that has really affected company value.
So, that’s why on a company by company level, we have seen valued be affected through ESG. Across the portfolio, I just expand that to this platform level. So, you multiply out all these different ESG impacts across an entire portfolio, and you realize that the opportunity is enormous.
We think about the total amount spent on workers comp across our portfolio, we’re talking about tens of millions of dollars, and so on. That’s just for the value creation side. There’s also this element of I think reputational issues, moral issues, reputational issues where you have individual companies that can really have their value effected through that, but also Partners Group as a firm. We’ve been around for about 25 years, spent enormous time building this company, and it’s brand, and it’s reputation from scratch.
You would hate to have one instance somewhere in that portfolio affect that reputation, that positioning, and the same goes for our clients. So, obviously we have a very wide range of clients, different types, many in the public sector, and so we have to be very careful about ensuring they’re not exposed to companies who have irresponsible business practices.
This is not about butterflies and feel good stories. This is about those factors that really do affect a business, and how that business is proactively addressing those topics for the long-term success of it’s operation.
Chris Riback: So, I want to follow up on the investing side, because it’s always fascinating to me in talking with folks like you who do what you do, but sit side by side on the investing team, and with the investing partners. You’ve just described the areas that you’re really looking at when you’re looking at a company, and the things that you’re responsible for.
Simultaneously, you’re partnering with colleagues of yours who might be of course concerned, and interested in what your focus is, but they also are looking at other areas. They’re looking at returns, they’re looking at ability for a particular company perhaps to act as a platform for other ad-ons later on.
How does that interaction work for kind of merging your point of view, and the areas that you’re worrying about, which might not be exactly where your colleagues are focusing, and how does that work for you? How does that work, and I’m kind of curious if you think that that’s firm-specific, if the way that you guys work on that is specific to your firm, or if it’s something that others could emulate?
Adam Heltzer: Great set of questions. If I forget any element of the multi-question, just kind of bring me back to it, and to give you a sense about this question of, how do I interact with the investment professional colleagues, let me just give you a brief window into my background, because I spent the larger first part of my career in what you might call the ‘do-gooding sector.’
I did development aid work in, and around Washington D.C. for about 10 years, then I swung to the World Economic Forum for two years. Their mission is committed to improving the state of the world, and after all that time, and I thought, ‘Hey, if I’m going to have a larger impact, I need to swing to the quote unquote other side’, the financial world part of the world that supposedly kind of didn’t get it when it came to sustainability in ESG.
Chris Riback: The side that you might have previously considered, the dark side, but which clearly is not.
Adam Heltzer: Yes, and even on the do-gooding side, there was always this refrain of, if only we could get the larger system to understand, and see what we see, then that’s when we experience systemic change, catalytic change, and so I thought instead of hanging out with this crew anymore, how about I go, and hang out with the other crew where the real systems level change as supposed to happen.
I offer that as backdrop to say that I was prepared for much more active resistance kind of like you’re alluding to. Is it a butting of heads, or is it sort of like when I speak to my colleagues, I’m taking something away from them, and I actually haven’t really encountered that, I don’t think that’s a specific thing to my firm.
I think it just generally works that the worst I’ll find is sort of passive resistance, more so than your hostile, active resistance, because it is a very crowd agenda that each of these people is working on. That said, our model in this is not that I, and my team are the sole carriers of the ESG values of the firm. The vision, and my job, and my mandate is to build a system wherein the investment professional is actually responsible for the ESG dimension of it, and how do we achieve that?
I’m not the person who is walking around the floor with a ruler rapping on wrists, it’s our global investment committee who has to kind of back up these values, and these principles, and I’ll give you an example to help illustrate. We had one investment opportunity in the past couple of years at a company that had a horrendous health, and safety record, 40 plus amputations over the last five years. Amputation was not necessarily full limbs, but still grisly, and completely unacceptable.
I was not the person who had to sort of come to the deal team, and say, ‘Hey guys, I know that you may be really wild about this deal. Financial terms look great, and I’m sort of killing the party’, it was the investment community that said ‘This is unacceptable.
We need to understand whether this is something that we can actually fix as owners’, and basically sent the deal team back with 20 plus questions about how to actually vet this topic, and come back to them with a plan for what op-ex then would be required to improve it, and also, there are financial benefits to that too, but still it’s something that has to kind of exist within the overall system of the investment process so that it’s not just siloed within the expert corner over here where the ESG team sits.
We think about the total amount spent on workers comp across our portfolio, we’re talking about tens of millions of dollars, and so on. That’s just for the value creation side. There’s also this element of I think reputational issues, moral issues, reputational issues where you have individual companies that can really have their value effected through that…
Chris Riback: That makes total sense. I mean, given what you were saying earlier in this conversation, you don’t look at this as pure do-gooding, I’m sure you want to do good, and I’m sure that you do, and that’s excellent, that should be part of something I guess that that anyone wants to do, but what I hear you creating, and aligning is a financial cost component to what you’re looking at, whether that’s on the creative side, or on the saving side, and so that would just make total sense that that should be directly aligned, and important to the other investment professionals that you work with.
Adam Heltzer: Yes, that’s so critical to the equation. So, we don’t come to them, and pitch these as extracurricular activities, we pitch them as core to the business case, and ideally, enhancing the business case.
Chris Riback: Yes, that’s what it sounds like. So, talk to me about the portfolio companies. Different PE firms have different levels of involvement with their portfolio companies. How involved in the portfolio company’s sustainability strategies should PE firms be in your view? Is that where a PEs, private equity firms strategy comes into play, or for you, and your philosophy, is it more of the thesis design, due diligence, investment stages that we’ve been discussing?
Adam Heltzer: You know, it runs like a thread throughout the entire process. So, it starts with the basic mandate that I received when I came here four years ago, which was, we want to do more than just screen out companies that are doing bad things for the world. So, it’s easy to just say we’re not going to invest in coal, or tobacco production, or insert whatever sector you want.
We want to differentiate by demonstrating to our clients, to others that when you are owned by Partners Group, you can expect to see measurable improvements in the core, most material ESG factors for that company. So, that’s where we start as a base, that during the ownership period we’re going to implement projects, initiatives to improve management of ESG. This by the way, is right alongside our traditional value creation activities, and expanding top line, improving margins, and so on.
Once we sort of had that as the first mandate, we of course went head first into portfolio companies, rushed in, and said, ‘Great, we would like to do employee engagement, and gender diversity, and corporate governance, and all these other things’, and then we realized, ‘Shoot, we should probably think more systems level about how to get this done’, and that’s when we back up to the earlier stages of the process, and say, ‘Okay, how do we, during due diligence begin to narrow the universe of possible ESG levers that there are down to a manageable five, to 10 that are most relevant for this company?
Among those five, to 10, how do we narrow that down to kind of three, to five where we actually think a tangible project can be implemented? How do we then design very tangible, and practical steps during onboarding of new investments to say, “Here’s our expectations for what we’re doing on ESG, here’s our reporting cycle, here are our values. Here’s why we think it works. Here are 10 other portfolio companies where we’ve done something similar, by the way, if you’d like to speak to them, can you make those introductions.”
Chris Riback: Do you have a formal process around that?
Adam Heltzer: Yes, absolutely.
Chris Riback: So, you start working with a new portfolio company, and you’ve got kind of a playbook on how to onboard them, and work with them vis-a-vis ESG?
Adam Heltzer: Yes. I mean, I don’t know if this is a Swiss thing, we’re a Switzerland-based company, but defining process is a big thing, and so any time you want to get something done at a platform level, you have to be very clear, and simple: Here’s what happens when, here’s who does what, and when.
So, if we want to achieve anything on the ESG side, we, of course have to come to our portfolio companies very well-organized, very clear expectations, and make sure that we follow through on those. So, that’s part of our system process now.
Chris Riback: And on the broad level, not just on this systems, and process, and the onboarding, but on the broad level of ESG, and everything that we’re talking about, do the LPs care, or is there a focus on returns?
Adam Heltzer: You know, the answer is yes, or both. So, the LPs, of course, care about returns, and you could say that’s always their first criteria, in some cases, no, but for the most part, yes. Do they care about ESG? The answer generally is yes, but the nuance comes in with, well how much do they care? In what way do they care? And that can range anywhere from ‘Please just don’t land me in the headlines’, to ‘Hey, we actually have principles, or values that we’re trying to uphold, and we want to see those values carried out through our investment portfolio.’
And that especially comes into play when you have an LP who for example, has maybe teachers, or other blue-collar workers as part of their pension base. So, they’re very interested in certain topics around labor rights, worker’s rights, and things like that.
So, they do care. I think where I see the friction, or I see the tension is that LPs are not so well resourced to follow through on oversight, and monitoring, and so they may say, ‘Yes, we care’, but they’re not as well equipped to be able to really push GPs to prove that what they say they’re doing, they’re actually doing, or to press for more substance.
So, I have at times felt a little bit of a lack of urgency, or ambition kind of cascading throughout that chain, but as we speak, those ambitions are getting greater, and greater, and I think the LPs are getting more, and more sophisticated about how to oversee, and monitor their managers.
Chris Riback: Yes, it sure seems like that’s where the trend line is going. Certainly on the interest side, because it appears, you would know better than I would, that LPs are getting guidance, let’s say, pressure would be another way to phrase it, from a number of different inputs, particularly certain LPs, and certain of the public ones like you mentioned.
And so it does seem like what you’re describing, that that’s where the trend line is going. I want to follow up on something that you started to hint on earlier when you were talking about various types of sectors. Do ESG principles mean different things as you consider different sectors? For example, you’ve invested in a pipeline company, how does a pipeline company maintain ESG principles?
Adam Heltzer: Yes, this is one of the key challenges for any ESG program. How do you adapt? How do you tailor the broad set of ESG down to an asset level? And the good news is that in this ecosystem of promoting ESG, there are organizations that have tried to make this easier, make the practice easier, and the key one, to respond to this question is the sustainability accounting standards board, SASB. It’s no accident that it rhymes with FASB.
The financial accounting standards board, I think it was established probably 70 years ago, 80 years ago, because companies were not consistently reporting their basic accounting numbers, different definitions from different companies, and so investors said, ‘We need to get more consistency so that you can compare between companies, and see what’s a better investment.’
About 10 years ago, there was a similar conversation around sustainability. Michael Bloomberg, a former chairman of the SEC, others realized that sustainability was not being taken seriously, because it was all greenwashing babble. It was, ‘We as a company are at the forefront of greening our operations’, but there was no way that an investor could really understand that, get any rigor behind it, any numbers behind it.
So, what SASB did was go sector, by sector, industry, by industry, collect experts from that industry, and have them agree on the top 10, or 15 most material ESG topics for that business. In the case of the pipeline company that you’re referring to, health, and safety would be a huge one, community engagement would be a big one, maybe how they source, and recycle their materials in a construction phase.
So, we use those standards. Many other managers use those standards to understand what the key topics are to focus in on, and then over time, you could imagine if you get more, and more companies who are reporting on those metrics, then you begin to have a data set you can benchmark against, and see how one company actually does perform against another, and begin to put some holes into every company’s claims that it is best in class in their most relevant areas of sustainability.
Chris Riback: And so does that work for some of the companies that might be in industries that are environmentally challenged for example? Does it create a benchmark, or an apples, to apples comparison capability? How does that work?
Adam Heltzer: It should over time, that’s what it’s meant to do. Naturally, it comes with a lots of kind of complicating factors. There are some metrics that aren’t quite normalized, and so you might have a metric where you see different companies reporting it, but as an investor, it’s hard to really understand the context, and so it still requires number of follow-up questions, but maybe that’s not too dissimilar from a normal financial analysis where you have a basic accounting metric where you say, ‘Okay, that might be cap X, but how do I understand that in the context of the operation of the business, and what insight does this give me into how the business is run?’
Chris Riback: Do you do measuring in terms of the impact of implementing ESG initiatives within the portfolio company, and I realize that that might not be phrased exactly right. I don’t think that you necessarily implement your ESG initiatives in the portfolio company, but do you create a measurement capability, maybe post-investment so that you can track how your assumptions, and beliefs going into the relationship, how they’re doing, I guess year, by year?
Adam Heltzer: This is, I would use the word ‘Hot topic.’ You know, for some it may not be so hot, but this is a very important, and continuing to grow area of the ESG world. The short answer to your question is, yes we do. I’ll explain what those things are, but then I’ll also explain why it’s an incredible challenge for anyone doing this work.
So, there’s two levels at which we measure, and track our impact. One is quite micro, it is at the company level. Each company I mentioned, we have an engagement, an engagement is comprised of three individual ESG work streams. It could be, ‘We’re going to reduce energy consumption by 10%’, it could be, ‘We’re going to reduce the lost time incident rate to below 0.5’, anything like that. When we actually track, and implement those projects, we, of course then capture what those impacts are.
Easy example, in the energy management cases, ‘We’ve reduced consumption by this amount, that translates to this amount of CO2 emissions avoided’, so something like that. So, we measure the impact of individual company level initiatives. We also roll out an ESG, KPI survey every year across our full direct lead portfolio, and in that survey we’ll also ask a wide range of impact-like questions: Have you had initiative to reduce consumption of these other natural resources, water.
What has been your performance on diverting waste from landfill, also policy maturity questions: Do you have a code of conduct, do you have a ethical supply chain policy? And so on. So, that survey allows us also to kind of aggregate up to top level impacts that are at the portfolio level. As for the challenge of this, and this is a broader challenge I think for sustainability in general, it is an area that is so rife with good stories, because I think back to your question about LP expectations, and do they care?
There’s almost a condition of, ‘Hey, if all the stories are good, we can all feel satisfied, the work is being done’, but in reality, of course reality is much more messy, and so I think what we have now is everyone’s measuring their good stories, but there’s not that much pressure to increase the data quality, and the rigor of it, because it’s a good story, everyone’s satisfied, and they go home.
So us, for example, I’d say the first year, or two that we did an ESG, KPI survey, we did sanity checks on the data, and we did random validation, but we didn’t beat up the numbers so much. The past couple of years, we’ve had to have follow-up conversation with each portfolio company for about an hour, to two hours where we’d actually go through their responses, and say, ‘Can you actually tell me, define exactly how you sourced this energy consumption number, or how you actually reported something as simple as a female as a percentage of the management team.’
We had one portfolio company when we validated that figure say, ‘Oh shoot, I’m sorry, I included the assistant in the number’, and that doesn’t really count, and that was my epiphany moment where I said, ‘If we’re not validating every single number in a follow-up conversation, I’m not sure that we can trust it.’ That condition exists also for public markets.
A lot of the ESG data, a lot of the ESG ratings in public markets is based on whatever the company has published, but a shockingly low percentage of companies have any processes in place to assure, or validate that data. So, there’s a lot of kind of cherry picking going on.
Chris Riback: I’m sure, and that’s a tough one to overcome. I mean, it’s hugely important, because if the facts behind the data, or the data behind the stories, if it doesn’t line up, not only then are those companies not accomplishing what we all believe they are, but it can kind of create a bit of a crisis of confidence I would almost think in the entire effort, and for somebody like you who this is at least so far, your life’s work, that’s got to be something that I’m sure that you care about.
Adam Heltzer: Exactly. My framing comment about this is that the pendulum, in a way, I see it swinging where there was a time that people said, ‘What’s this ESG stuff? It seems like extra, don’t bother me.’ Then you have a group of people now who say, ‘ESG is everything. If you’re not doing ESG, you’re being left behind. You’re leaving money on the table. It’s a complete driver of value’, and that the reality is somewhere in the middle, and to get in the middle, we have to kind of wrestle with these more pragmatic, messy questions like the data management process, how people can actually trust this data.
And when you have people just kind of producing this false data, just as you’re saying, you begin to poke holes in what should be a really important part of the investment process.
Chris Riback: So Adam, in listening to you, you clearly work across kind of horizontally all of your portfolio companies. I’m wondering, are there any benefits, or are there any actions that you take maybe top down then as you’re gaining insights, and gaining information across that full range of portfolio list?
Adam Heltzer: Yes, I mean after a couple of years of implementing these ESG engagements with our portfolio companies, we began to pick out patterns, recurring themes, project types that kept recurring, and this also brings us into the most exciting part about being at a platform like Partners Group, which is that we’re dealing with scale. We have 60, to 70 assets globally. If you count up all the employees that populate our companies, we’re talking about at 200,000 people plus.
So, this is really our chance to make a larger impact across a much larger range of people. So for example, health, and safety, we probably observed, and worked on, I don’t know, 10, to 15 different health, and safety initiatives across our portfolio, and then realized, ‘Shoot, we can do this much more efficiently. So, why don’t we compliment the bottoms up company by company engagements with a top down we called sweep.’
The idea here is simple: You lay up all those assets 60, to 70, you come up with a simple, but sophisticated categorization scheme. How do we figure it out what is high risk, medium risk, and low risk based on the nature of the work, based on the home country, and so on, and from there you figure out for the high risk companies, we need to have a fairly standard way to assess the quality of their health, and safety program.
Get in an expert consultant partner for this special field. They go in there, identify the gaps, and we systematically close them. Even for the low risk companies, if we undertake this exercise, we can still distill for them best practice in this area. So, that’s something that’s going to help in safety, doing the same thing on fraud risk, and as you can imagine, opportunities to do the same in other areas: Human capital development, employee engagement retention, gender diversity, and so on.
So, this for us is a really exciting area of growth. How do we make the practice of ESG scalable, efficient, and effective?
Chris Riback: In listening to you, I’m curious about another point, and that is the relationship between the businesses, and public policy. Public policy had, I would argue, been going very directly in one direction, in a very ESG-type direction. Certainly in the last couple of years within the US at the federal level, there have been rollbacks of a number of those regulations.
You know, there’s been pullout of Paris Accords, and things like that. So, what I’m getting to is that you then hear however, businesses saying, ‘Well, that’s okay.’ You know, governments, and consent public policies, that’s what they’re supposed to do, but our business plan, our value chains, our operational integrity is already built with these ESG factors ingrained.
And so yes, public policy might evolve, and maybe at the US level, I know you’re a global company, and you’re investing in global companies, but those public policy shifts aren’t necessarily going to impact how we want to change, or would change our operations. So, I guess to put a point on it, do you feel like businesses are post-public policy driven? Meaning, it’s not the public policy [00:30:30] that’s bringing these horses to water, these horses are going to the water on their own.
Adam Heltzer: You know, a lot of examples spring to mind. I think it’s a mix like most things, but I do think for the large part, they are post-public policy, and I’ll give an example. After the US withdrew from the Paris Accord, we have companies here in the US that build solar farms, and so we had tons of questions from clients, and others saying, ‘Oh shoot, how has that affected your portfolio?’ And when I caught up with the head of business development, they said actually, complete boon.
You know, they called it the ‘Trump bump’, because despite the lack of leadership on the public policy side here, they then experienced an inflow of corporates that were saying, ‘We would like to have you build us solar farms, because we’re not getting it from the government side.’ And so it was sort of a counterintuitive development relative to public policy, but one that happened nonetheless.
There are others. There was a business that produces the active pharmaceutical ingredient in opioids, and we evaluated this a number of years ago before there was CDC guidance recommending against opioid use, or prescribing opioids over a certain number of days, and so even though the regulation was not there, it was in our own interest to give a very hard-nosed analysis to like, ‘Where is going? How could it end up, and how do we as a business, if we were to invest in this, how would we actually stay ahead of the regulations to kind of get ahead of what might be coming?’
So yes, in general I don’t experience a lot of businesses sort of just watching that regulation line, and saying, ‘We’re going to stay the minimum above it.’ They’re thinking a bit more expansively, a bit more into the future, a bit more about their various stakeholders, especially in consumer-oriented businesses about where they should position themselves relative to an emerging issue.
Chris Riback: Yes, an interesting point there on the consumer facing businesses as well, they have an added layer of feedback, as it were, if they were moving into areas that weren’t satisfying to their consumers, that would create a whole other set of problems. I guess that’s some of the risk mitigation, and risk management that you were talking about at the top. To close, Adam, I’ll ask you to look not backwards, but forward. What’s next for ESG-focused investing?
Adam Heltzer: I’ve been thinking of it like an arms race for substance. I think there was a period when it was a binary, ‘Will you integrate these non-financial factors, these ESG factors into your analysis, or not?’ That was probably about 10, or so years ago. Then there was a series of questions like, ‘Okay, if you’re agreeing to do this, how are you doing it? Just demonstrate your process.’
Then there was an era of, ‘Well, great that you’ve got a process. Can you demonstrate that it’s effective’, and there’s a number of managers that are kind of coming into that space now, and now feel they need to differentiate based on substance, and saying, ‘Hey, we actually are using these metrics to improve our investment, to improve our returns, and here’s how we can demonstrate that we’re actually doing it.’
The other element of substance I think is the transparency, and the candor around this point around positive stories, versus negative stories. I think to maintain credibility, investors have to be honest, open, candid around not just what are the wonderful things that are happening through their investments on the ESG side, but also what are those kinds of negative impacts, and how they’re being managed, and if they’re not being managed.
So, my sense is that LPs are sort of past the point of ‘Great, you have an ESG program’, and now are trying to see where managers are delivering something beyond just having something, but actually demonstrating that it’s improving the investment process.
Chris Riback: The substance will matter, which I guess is a exactly where somebody like you would want this to be.
Adam Heltzer: Exactly.
Chris Riback: Adam, thank you. Thank you for your time, and thank you for describing what was just a fascinating, and important area of work.
Adam Heltzer: It’s been a pleasure. Thanks so much, Chris.