ESG at Industrial21

What is our understanding of ESG in the context of Industrial21 activities?

ESG issues are multi-faceted. In the context of Industrial21’s work, main areas of focus (without excluding other issues) are:

Environmental

Energy & water usage efficiency, land/water/air contamination & waste management, global warming, hazmat control, biodiversity, and overall resource utilization

Social

Employee equality, diversity, welfare & development, non-discrimination, workplace environment, community impact, human rights adherence in the supply chain.

Governance

Adherence to all local & global regulations and ethical standards, anti-bribery/corruption/money laundering, governance of sustainability issues, board-level responsibilities for ESG.

In Industrial21's understanding, ESG is actually not just a set of values to be adhered to, but an actual value driver for Industrial21’s activities through creating responsible, long-term successful businesses that can be exited at higher valuations through best-practice ESG compliance. Thus, there is an alignment of interest between investors’ economic perspective and other stakeholders’ sustainability demands.

ESG-related policies and ESG integration into investment decisions:

Industrial21 monitors ESG compliance on four different levels:

At the Fund Level. This task is performed on a very comprehensive and detailed level by the Funds‘ Directors, who employ various expert service providers for issues relating to ESG, such as Anti-Money-Laundering, Anti-Bribery, Capital Adequacy, compliance with Financial Commission regulations, etc. At regular board meetings of the Funds‘ Directors, the reports of the different compliance officers are reviewed, and, if necessary, corrective action is initiated.
At the level of Industrial21 (the advisor) and affiliates. All professionals of Industrial21 and all affiliates are held to highest professional ESG standards and have signed a respective policy. Industrial21 employs a dedicated compliance officer at the Managing Director level, who is in charge of reviewing and enforcing ESG guidelines. Any arising issues are immediately addressed on an informal basis, or, if required, in formal team meetings.
At the level of the Funds‘ portfolio companies. Each executive at a portfolio company has committed to the Funds’ ESG standards and has signed a formal ESG policy (as defined by the Board of Directors of the Funds), and they are responsible for ensuring that the policies are strictly enforced at their respective company. The approach to ESG in portfolio companies is risk-based. Where portfolio companies have a potentially higher ESG risk exposure, for example due to the geographies they operate in, a full ESG-sign-off of each individual employee may be required by the Fund.
In case the above-mentioned entities are still in doubt about, e.g. the appropriateness of a proposed investment, they may ultimately turn to Limited Partners for advice/approval.

Potential ESG issues are the very first analysis milestone in any proposed deal. No deal team time is spent on the analysis of economic, financial, legal, risk or return perspective of a proposed investment until and unless its potential ESG issue are resolved first.

Individual ESG topics (climate/environment, labor, anti-bribery, …) are addressed at the portfolio company level where applicable, e.g. anti-bribery at an international project business, labor at a company sourcing entirely from Asia, environment (energy efficiency) at a lighting solutions provider, etc.). Climate policy is a major topic of business risk assessment and may lead to the temporary, or even permanent, ban of sectors that we consider to be potential climate policy victims.

Material ESG issues would be for example i) products procured using unethical labor or environmental practices, ii) business practices engaging in questionable payments to customers/agents, iii) use of processes hazardous to the environment, iv) enterprises run by questionable individuals (every MD of a potential investment and any potential new hire is background-checked by a professional investigative firm), etc.

Other (often technical) consultants are engaged on a case-by-case basis depending on the nature of the acquired business. A six-eyes principle on any deal seriously considered and the involvement of the dedicated compliance officers at Advisor and Fund level ensure maximum transparency.

No investment decision is taken by the Fund’s Directors without prior discussion and assessment of the target’s ESG status.

All Industrial21-related entities adhere to a code for responsible governance and internationally recognized standards for transparent controlling.

Remuneration:

All executives have ESG elements as part of their appraisal process. In addition, most team members are remunerated based on the exit valuations of portfolio companies, which are directly impacted by ESG-compliant behavior via transaction price offerings of potential buyers: if there may be ESG issues, valuations will be substantially lower. Conversely, ESG is a major value driver for a successful investment – both economically for investors, but also towards other stakeholders.