Responsible Investment approach
20
Focus on NAM’s Private Strategies
ESG in the private markets space and the opportunities the asset class provides.
Private market investors are capitalizing on these opportunities in various ways:
Environmental, Social, and Governance (ESG) considerations have become increasingly prominent in private markets as the asset class offers unique opportunities for meaningful ESG implementation and value creation. The structural nature of the private market investment allows for integrating ESG factors more systematically into the investment process, from initial due diligence through ongoing asset management. The long- term nature of the investments (typically 5-10 years) and the ownership levels enables another layer of ESG improvement and engagements over time. All of this provides the investors with a method to leverage the ESG opportunities in measur- able ways. While ESG integration continues to evolve, data indicates 28 that private market investors prioritize ESG practices as key driv- ers of long-term value creation and risk mitigation. The private market asset class continues advancing ESG implementation, given its structural advantages and increasing LP demand for responsible investing approaches. ESG value proposition in private markets Private markets offer unique advantages for ESG implementa - tion and value creation. The long-term investment horizons, typically spanning 5-10 years, provide time and opportunity for significant ESG improvements. Investors in these markets often hold control positions, allowing them to directly influence company strategy and operations. This control, coupled with less public scrutiny compared to public markets, offers the flex - ibility to implement transformative changes. Private equity firms bring substantial operational expertise to their portfolio companies, which can drive tangible ESG changes. This hands-on approach enables the implementation of sustainable practices and the development of ESG-focused initiatives. Additionally, certain sectors within private markets, such as infrastructure, often have inherent ESG linkages. For example, renewable energy projects naturally align with environmental sustainability goals. By leveraging these structural advantages, private market investors are well-positioned to capitalize on ESG opportunities, potentially enhancing societal impact alongside financial returns.
• Conducting rigorous ESG due diligence to identify risks and value creation avenues • Setting and monitoring ESG KPIs for portfolio companies. • Implementing operational improvements to enhance sustainability and reduce costs • Developing new products and services aligned with sustainability trends • Providing detailed ESG reporting to limited partners Considering the case of TDR Capital's investment in Aggreko 29 , a global leader in temporary power solutions. TDR saw an op- portunity to leverage Aggreko's market position to drive the transition towards greener technologies in off-grid power gen - eration. Since acquiring the company in 2021, TDR has support- ed Aggreko in establishing new divisions focused on energy transition and hybrid technologies, with 70% of annual capex 30 now directed towards products supporting sustainability goals. While ESG integration is still evolving, we believe that private market investors view strong ESG practices as one of the key drivers of long-term value creation and risk mitigation. In our view, the private asset class is well-positioned to continue ad- vancing ESG implementation, given its structural advantages and increasing limited partner demand for responsible invest- ing approaches. As the sectors mature, we see great opportunity for private assets to become leaders in translating ESG considerations into tangible business improvements and financial returns. The ability to drive operational changes, coupled with longer investment horizons, allows private market investors to imple- ment meaningful ESG initiatives that can create lasting value. This positions the asset class uniquely to address global sus- tainability challenges while potentially enhancing investment performance. ESG integration in private markets and how it builds on a long ESG track record Over the past few years we have developed a comprehen- sive ESG screening and integration in our private market's strategies, that is built on our long-standing commitment to responsible investing. Our approach to ESG integration is built on four core ESG pillars; research and due diligence, engage- ment, exclusion and monitoring & reporting.
28) ESG data Convergency Initiative (EDCI) PWC EU Private Markets: ESG Reboot. 29) Reference to companies or other investments mentioned should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration. 30) Source: TDR Capital December 2024.
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