responsAbility and ESG
Environmental, Social & Governance
What is ESG Assessment?
"ESG or "Environmental, Social and Governance" assessment is a review of a company's practices on various sustainability parameters. This helps ensure that the company's operations will do no significant harm to environment or society. Improving a company's ESG performance generally also improves the company's business performance, making ESG not only the basis for sustainable investment, but also good for business.
(E) ENVIRONMENTAL CRITERIA
Environmental criteria are used to evaluate how a company performs as a steward of the natural environment. Companies are expected to identify and manage risks linked to the loss of biodiversity, the emission of greenhouse gases, the degradation of water quality and air quality, etc.
(S) SOCIAL CRITERIA
Social criteria examine how a company manages relationships with employees, suppliers, customers and the communities where it operates. For instance, our portfolio companies are, among other things, expected to pay wages that meet or exceed industry or legal national minimums, treat their employees fairly, and create structures that give employees the opportunity to present their views to the management.
(G) GOVERNANCE CRITERIA
Governance criteria deal with leadership, executive pay, audits, internal controls and shareholder rights. Here, our portfolio companies are expected to, among other things, distribute the rights and responsibilities among different participants in corporations, including the board of directors, managers, shareholders, and stakeholders.
ESG Process and Performance at responsAbility
Screening
The ESG exclusion lists for each responsAbility investment product covers, at minimum, the industries and activities listed in the IFC exclusion list, and often much more. Prior to any investment, all potential portfolio companies are screened against these exclusion lists. No investments will take place for any product if the potential borrower is engaged in excluded activity (e.g. involved in harmful or exploitative forms of forced labour or harmful child labour; production or trading of weapons and munitions; involved in money laundering and terrorism financing; not respecting human rights, etc.).
Potential portfolio companies are screened against a set of investment criteria outlined in the product’s Eligibility Guidelines. These guidelines also include specific requirements regarding the borrower’s commitment to environmentally and socially sound practices.
Categorize ESG & Investor Risk
Each proposed investment is categorized as ‘low’, ‘medium’ or ‘high’ as regards its ESG risks. This classification is equivalent to the IFC’s proposed risk categorization. All environmental and social risks are considered in the context of inherent sector risks, the scale of the company’s operations and whether the investment involves new or continued operations and locations.
As we are sector thematic, we invest in 3 overall sectors: Financial Inclusion, Sustainable Food and Climate Finance, where the type of risks linked to environmental, social and governance criteria are intrinsically very different. Regardless of the risk category, all portfolio companies must meet applicable national laws and regulations concerning ESG issues.
Carry out ESG Due Diligence
Even if a potential investment appears to comply with the ESG criteria that have been set out for each fund, responsAbility’s investment teams must verify this compliance, normally during the due diligence (DD) visit carried out before disbursement. This ESG DD entails active engagement with each potential portfolio company, collecting and analyzing their status on ESG performance.
responsAbility’s investment universe mostly consists of mid-size companies that are rarely listed on capital markets. Consequently, almost no ESG information is publicly available. This means that ESG data must be collected and assessed by the investment teams. Due diligence of ESG issues is carried out by responsAbility’s investment teams and ESG experts. This active ESG approach allows responsAbility to ensure that the appropriate values are integrated into investment strategies.
