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ASrIA Workshop |
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 Workshop for Private Equity / Venture Capital Professionals: Sustainability in Investment Practice |
Tuesday, 3rd December 2002 |
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Event Sponsor: |
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Post workshop materials:
Summary On the afternoon of Tuesday 3rd December, ASrIA held its first workshop for the private equity community in Hong Kong. Sponsored by GE Equity, the event was held in the Hughes Room of the Foreign Correspondants’ Club in Central. Due to a high level of enthusiasm for the event, everyone was somewhat packed into the room. Around 40 delegates attended and heard some very insightful presentations and participated in a lively question and answer session. Louisa Mitchell, ASrIA's Executive Director introduced ASrIA to the audience and explained that to date ASrIA has worked primarily with publicly listed portfolio managers, but that ASrIA would like to work with the private equity community as well, to help develop sustainability in direct investment. Louisa explained that the purpose of the workshop was (a) to be educational in advising and discussing how to develop sustainability practice in private equity investment, but also (b) to estimate how ASrIA can work with the private equity community going forward, perhaps by putting together a working group to drive forward sustainability in private equity, potentially by developing a framework or guidelines for direct investment groups to work with. ASrIA’s role within the private equity community in Hong Kong is still a topic of discussion and we are determining with the community what are the next best steps. Tessa Tennant, ASrIA's Executive Chair, spoke first after the introduction. She gave an overview of how SRI has developed around the world, focusing particularly on the increasing importance of good governance of companies and the inclusion of social and environmental factors within good governance structures. She highlighted the chronic environmental and social prognosis for Asia and the opportunities for investment that exist at this early stage in ‘industries of the future’ such as cleantech, renewable energies, waste management and others. As well as these investment opportunities, she explained how public equity portfolio managers see the value in looking at traditional companies from a triple instead of a single bottom line perspective. She explained the potential benefits of doing this early on in a company’s life, potentially at the first round financing stage and also the importance of having companies that want to list ready for a growing number of institutional investors now looking at these triple bottom line issues as part of their investment practice. Harjit Bhatia, Managing Director and Regional Head of GE Equity, spoke next and focused on the dramatic changes currently taking place in the business world and the fact that the time for developing sustainability in business has come. As major shifts are taking place in the world's production bases to Asia, and top quality products are now being produced in this part of the world, there is currently not a single company out of the top 100 or more in the world that does not have an Asia strategy. Because of this shift, there will be a growing focus on introducing global standards to this part of the world, and ultimately there will likely be changes in rules and regulations. In terms of addressing the question as to whether sustainable and responsible investment makes good business sense, he highlighted that there are two components to good business sense: (i) good business judgment, (ii) understanding and developing the process to achieving a good product/project. For long term business success, it is important to work in harmony with the environment, otherwise the business will ultimately cause resistance from society or environmental resources, plus the cost of finding upfront solutions rather than addressing problems caused by an unsustainable business model later on in the process is usually significantly lower. And private equity professionals should not be afraid to walk away from a deal if sustainability issues cannot be fixed up front – there are always other deals to do. Similar to what our annual conference delegates heard from another Asian business leader, Harjit reminded us that SRI is 'a mindset thing' that has to become a critical part of all of our business thinking. He encouraged the private equity community to work together constructively in developing this thinking. After these two presentations, there was a question and answer session followed by a quick tea break for some networking. The question and answer session focused on how to get SRI thinking more mainstream by involving consultants, getting more institutions on board so that it doesn't feel so much like 'missionary' work, encouraging legislation. This final point prompted detailed discussion on the importance of maintaining principles, and not just letting SRI become rules based which will not be so effective. Some fear was expressed that the Sarbannes-Oxley act might pull us away from principles and draw us into focusing on corporate governance 'rules'. We agreed that ASrIA would continue to work hard to educate about the importance of principles and trust in today's environment, particularly in Asia where there is a massive desire to attract international capital. After the tea break, our next two speakers focused in on the detail of how to incorporate sustainability criteria into the direct investment process and what issues to consider. Melissa Mowbray d'Arbela of Maven International, an SRI focused private equity house in Hong Kong, spoke about 'A Practical Approach to SRI in Private Equity'. She explained that the private equity community are doing most of the necessary work already as unlike public equity investors they: conduct meaningful due diligence, tailor investment structures, apply meaningful shareholder pressure. In many cases it may simply be a case of expanding their due diligence on certain issues, incorporating some new parameters into investment structures and applying shareholder pressure on some different issues. Melissa gave two detailed examples of Maven investments that illustrate the SRI criteria they looked and the benefits of doing so, particularly in terms of returns. Melissa also talked about the importance of encouraging improvement in some cases rather than walking away. Maven's 'door stopper' question is to see whether the financials of a company can support its business, if no, they walk away, if yes then they work with them and try to improve them even if they do not like some of their practices from an SRI point of view, just as they do with some of their regular business practices – as Melissa noted, few companies looking for private equity financing are perfect from a business and financial viewpoint, let alone an SRI viewpoint. This proactive and hands-on approach has resulted in some highly positive changes at some of the companies Maven is invested in. See Melissa's presentation for some detail on the kind of SRI criteria that Maven have analysed and monitored in previous investments. The final speaker was Tim Krause who explained the business case for SRI and gave a detailed case study of a successful IFC investment that had incorporated SRI criteria and requirements and an unsuccessful case study that had not worked so well. One long term financing for Plantation Timber Products Holdings Limited is a particularly good example of how a focus on SRI had been a sound investment rationale. Tim highlighted the difficulties of implementing SRI criteria – he noted that the company struggled with being requested to audit accounts to IAS standards, they struggled with the discipline of taking Board minutes and other international management practices, but after a couple of years, and after looking for further financing, they realized that incorporating best practice at an early stage had helped them to become the market leader in the manufacture of medium density fibre boards (MDF). And IFC firmly believes that they would not have made such a strong return on capital if they had not pushed the SRI criteria. See Tim's presentation for more detail on this case study. Tim also gave a 'bad' case study of a situation where the IFC had attempted to set up best practice standards and adherence to some social and environmental standards that IFC found acceptable when they made an investment into the company. As IFC undertook the monitoring of the investment they realized that even though the company said they were doing things the way IFC requested, they were not actually doing so at all, and nothing the IFC did could get them to behave in a responsible manner. Consequently the return on the investment has not been strong and it will be difficult for the company to be sold by a trade sale to an international company or on the stock market. After the final presentation, there was a detailed question and answer session covering topics such as the importance of not only encouraging responsible behaviour in companies but also encouraging appropriate communication of sustainability strategies to the market so that companies are adequately rewarded for their progressiveness and the messages are perpetuated around the market, and the importance of continually trying to articulate the business and financial case for sustainability so that skeptics are converted and these criteria become increasingly accepted in the market place. The Asia Venture Capital Journal attended the workshop and aims to publish an article covering the event in their January edition. Attending Institutions:
ABN AMRO Asia Capital Investment Ltd. |
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