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3i Group plc

PRI reporting framework 2018

You are in Direct – Private Equity » Pre-investment (selection)

Pre-investment (selection)

PE 05. Incorporating ESG issues when selecting investments

05.1. During due-diligence indicate if your organisation typically incorporates ESG issues when selecting private equity investments.

05.2. Describe your organisation's approach to incorporating ESG issues in private equity investment selection.

The 3i investment selection process can be broken down into three key stages; Early stage, Due diligence and Investment.  Consideration of ESG issues occurs at each stage in the investment process to ensure that new investment opportunities meet the minimum standards required of 3i portfolio companies. The process is followed consistently across the Private Equity business, there are no differences in how ESG issues are considered across sectors or geographic regions. ESG is an agenda item at each stage in the investment decision process.

Early Stage

  • The opportunity is screened against 3i “exclusion and referral” lists, which identify businesses and activities in which 3i will not invest and those which are particularly sensitive or potentially involve material reputational issues and may necessitate more in-depth due diligence or risk assessment and require approval from 3i's CEO and General Counsel before the opportunity can be progressed
  • The deal team provides confirmation that the new opportunity is not covered by the "exclusion and referral" lists

Due diligence

  • When a new opportunity reaches an advanced stage in the 3i investment process (typically the point at which 3i commits significant resource and cost to external due diligence), a specialist external ESG advisor completes a high-level review of the opportunity from an ESG perspective. The advisor reviews any relevant documents relating to the target business which are available at that stage (typically information memoranda and vendor due dillignence reports), and discusses the business with the 3i investment team. Following this, the adviser produces a written report which highlights any potentially material issues and any areas where further diligence is advised pre-investment, or where further work is advised in the 6 month period immedialtey following investment
  • Any potentially material issues raised by the advisor are discussed during Partner Review meetings and/or at the Investment Committee
  • Where 'deep dive' ESG due diligence is advised, the broad objective of this ESG due diligence (in addtion to any specific ESG issues identified by the initial high-level review as warranting further more detailed and targeted investigation) is to confirm that the potential investee company complies with all applicable local laws relating to environmental, social, health and safety, extortion, bribery and corruption matters, and that the management can demonstrate that it has the commitment, capacity and track record to  effectively identify, monitor and manage the potential ESG risks facing its business

Following 3i's investment

  • Where 3i's due diligence has identified actual, material environmental, social or governance risks, 3i may require the company to commit to implementing appropriate measures to mitigate these risks (over a reasonable time frame), including meeting relevant international standards where these are more stringent than applicable local laws. 3i will support the company to do this by developing action plans with appropriate targets, timetables and resources
  • Where appropriate, conditions may be included into the legal documents and relevant actions to be addressed in the 180 day plan in respect of ESG issues
  • 30 days after investment a formal review is undertaken. This includes current trading and outlook, review of the Board and management and thescope, content and timetable for the 180 day post-investment action plan. A formal review of the progress of the 180 day plan is then carried out after 90 days and 180 days

05.3. Additional information. [Optional]

PE 06. Types of ESG information considered in investment selection

06.1. Indicate what type of ESG information your organisation typically considers during your private equity investment selection process.

06.2. Describe how this information is reported to, considered and documented by the Investment Committee or similar.

Since 2016, as part of our PE investment process, we have a high-level review by an external firm of specialist consultants who review the investment papers prior to extensive due diligence being commissioned. They have a call with the investment team to discuss the business and this is followed up with a written high-level report and summary of potential ESG issues which should be investigated more thoroughly in due diligence or addressed immediately post investment as part of the 180 day plan. If the high-level report identifies potentially material ESG issues which warrant more detailed investigation prior to investment, 3i will engage specialist due diligence providers to carry out this ‘deeper dive’ due diligence. The key findings of the high-level ESG report are summarised in the body of the investment paper along with the results of any ‘deeper dive’ ESG due diligence as well as  ‘risk matrix’ document which accompanies the investment paper. The material due diligence issues (including any ESG issues) are considered by the Investment Committee, which may raise questions with the investment team and/or require further work to be done if it sees fit. The full ESG report is also appendended to the investment paper.

PE 07. Encouraging improvements in investees (Private)

PE 08. ESG issues impact in selection process (Private)