StepStone believes that ESG factors can be significant toward the long-term value creation proposition of a portfolio, and consequently, drivers of investment returns. StepStone has integrated ESG factors in its investment process and considers it to be a core part of its mission to maximize risk-adjusted returns for its clients.
When considering a primary investment, StepStone looks at the manager's approach to ESG. This is reflected through the manager's track record, corporate culture, and participation in sustainability and ESG-focused organizations. Information accessibility can also illustrate accountability. To that end, StepStone has created an ESG Committee. The ESG Committee’s mandate is to develop StepStone’s ESG policy, approach to ESG analysis, advocacy and provide training across the firm. Importantly, the ESG effort is supported by the entire Partner group, across 16 offices in 11 countries, who all have responsibility for policy implementation. Research is carried out by the more than 150 investment professionals, who are organized by sector and geography to ensure broad and deep coverage of the private markets.
The team that conducts the due diligence is responsible for the fact finding through review of ESG data and sustainability reports. Each investment team has an ESG sector team leader, such that each of StepStone’s sector teams includes a research professional who is responsible for the oversight of ESG due diligence and monitoring across the sector team’s investment activity. The ESG sector lead drives ESG best practice in their respective vertical and engages with the ESG Committee. Every Investment Memorandum has a dedicated ESG section – these are reviewed by the ESG sector lead and ESG Committee. Then, as part of the investment process, the information is discussed in the Investment Committee meetings. Our comprehensive approach to investment analysis looks to incorporates ESG considerations as part of the overall process.
As shown above, ESG considerations are intricately woven into our investment process. All investments have ESG issues explored during due diligence which are then considered by both the ESG Committee and finally by the asset class Investment Committee. Hence, when an investment has been approved by the asset class Investment Committee, it means that ESG considerations have been opined upon as well. It is possible that through this process, certain investments do not proceed based on weaknesses in the investment team, their strategy or specific ESG issues. For example, StepStone considered an investment in an organization where there had been public concerns around discriminatory practices. StepStone looked to review the changes in the organization post these complaints – from training, hiring practices, whistle-blowing procedures, board composition, etc. Ultimately, StepStone did not proceed with the investment. In another instance, StepStone was reviewing a general partner focused on mining operations – this involved extensive evaluation of the manager’s approach to both community engagement, environmental assessment and procedures. StepStone will exclude investments that do not comply with the rules and regulations of the country in which they operate. StepStone will also exclude investments based on client requirements (e.g., no tobacco, gambling, etc.)
StepStone is committed to being a responsible steward through its investments across sectors, geographies and investment strategies. As such, ESG was swiftly integrated into our due diligence process upon becoming a signatory to the UN-supported Principles for Responsible Investment (“UN PRI”).
The Firm remains an active participant through its annual reporting to PRI which details the implementation of the Principles. This ensures the Firm’s accountability to the principles we have adopted, encourages transparency in disclosing our Responsible Investing (“RI”) activities, and helps us continue to develop and assess our RI policy and ESG program against objective metrics.
When StepStone is conducting due diligence on an investment opportunity, we look to see how the various ESG risks and opportunities have been evaluated by the general partner. As such, we expect this to be explicitly considered within the financials where relevant. For example, if we are reviewing a shipping investment then we expect the manager to have considered the cost of ballast water purification and potential for accelerated depreciation of vessels that do not comply. Alternatively, if we are reviewing an oil fracking opportunity, then we expect various costs around water management, land rectification to be included. These issues often become points of discussion with the general partner to understand how these issues have been included or not and why.
ESG is one of the many factors that contribute to StepStone’s investment decisions. During the due diligence process for primary funds, we ask a series of questions which address social and environmental impact, and the firm’s governance practices. Examples of questions include:
• Please describe any programs in place at the General Partner or at portfolio companies that attempt to improve the impact on the environment (e.g., energy policies, paperless office, process improvements, carbon offsets, etc.)
• Has any portfolio company been found out of compliance with laws or regulations governing disposal of hazardous waste or pollutants? What steps has the General Partner taken to ensure such violations do not recur?
• Please describe any programs in place at the General Partner or at portfolio companies that attempt to improve the impact on the community, either local or global?
• Will there be an Advisory Board consisting of representatives from the limited partners with the ability to act as a check on the management of the fund? If so, please define the standards of care and of indemnification of those representatives and describe the functioning of the Advisory Board, its composition and its selection criteria.
We also inquire if the manager is a signatory to UN PRI and whether an ESG policy has been implemented.