How does ESG affect investor strategy? – Sustainable finance

The Corporate Social Responsibility (CSR) has encouraged financial players (funds, private and public financial institutions) that have been at the center of concerns in France for many years to make sustainable investments and therefore prioritize environmental, social and governance (ESG) criteria in their internal policies. ). France is even seen as a class leader and a good student in one context community and even beyond.

Responsible investment, the main criterion

What are we talking about?sustainable investmentimpact investing or responsible investing, the terminology changes, but the objective remains the same: if financial performance is a key component of investment selection, so are ESG criteria.

Thus, an increasing number of investors are signing the United Nations Principles for Responsible Investment (UNPRI). Principles of Responsible Investment). It is an investment initiative implemented in partnership with the United Nations and contains six commitments, “([…] consider ESG issues in investment analysis and decision-making processes »^[1]. These six commitments made and promoted by the signatory institutional investors are also the commitments that will guide and define investment decisions during fundraising.

Whatever the reference, it now seems necessary to ‘stamp’ the investment fund’s ESG. The most advanced have created “impact funds”. Many funds are labeled with Article 8 (SFDR regulation). We have observed a trend towards sustainable and responsible investment in targets that complement or enhance the ESG score of investors or their investment portfolio. The overall objective is to enable and ensure optimal long-term value creation for the benefit of the companyall the actors while participating in collective efforts” development sustainable markets contributing to a better world for all “. So it’s no surprise that these investors are looking for transactions that meet their ESG expectations, resulting in more portfolios. green » and more responsible from a point of view social.

Application of ESG criteria in practice

Many tools have been developed and are used by investors to decide on appropriate investment programs, audit targets, and also integrate ESG at both the fund and portfolio company level. In each case separately, the most important ESG factors and events taken to answer them. there is, moreover, products, experience and internal instruments houses. Indeed, the relevant factors vary from one fund or company to another. Arbitration may sometimes be necessary between conflicting ESG requirements.

ESG Audit

In addition to the usual legal, financial and technical audits, it is common to conduct special ESG audits. These are due diligence enables a better understanding of the target’s risks and opportunities during targeted investment. In parallel legal checks It can be enriched by the analysis of new legal risks related to ESG.

Many key questions will relate to a target’s ESG strategy: What are they? ESG factors most important? What is ESG policy in place? Which ESG indicators does it follow? The target’s ESG strategy and culture are the investor’s, etc. is it compatible with These relevant questions will help you identify and understand ESG risks and opportunities for impact operating model the perception of the target and its brand and its cultural fit with the target group. Similarly, ESG criteria will be emphasized when fund managers decide to sell their holdings in a corporate or other fund.

Target’s CSR commitments

When acquiring a stake in a financial player, the target will often have to commit to implementing ESG criteria, starting with appointing a CSR manager and implementing a CSR policy, and more generally, making adjustments to the targets’ governance structure. complying with ESG monitoring obligations after the transaction closes.

Investors will also require ESG provisions to be included in investment covenants or protocols entered into when capital is raised. To this day, for example, the obligations arising from the law of Sapin II are referred to^[2]duty of vigilance law^[3]Covenant law^[4] even the Climate and Sustainability Act^[5]. For example, investors will ask the target and its management not only to comply with ESG rules and guiding principles, but also to comply with their group’s ESG policies, communicate them to stakeholders and ensure their effective implementation through new key performance indicators (KPIs) for managers. This last point will be particularly important in the case of reinvestment by managers. Some management teams of management companies have decided to index part of themselves carried above Objectives continuity and a controlled financial environment.

Therefore, we are witnessing a two-fold evolution that will apply to any company seeking financing: (i) the increasing application of regulatory provisions that are still non-binding on a voluntary basis, and (ii) the comprehensive strengthening of mandatory regimes. In one way or another, at least in part, directly or indirectly, it will ultimately apply.

But also

Virginie Brault-Scaillet, A consultant at BCLP Paris, he works on mergers, acquisitions and private equity, restructuring, corporate finance and joint ventures, corporate law and commercial law, and complex and cross-border transactions. His expertise spans TMT, media, hospitality and leisure, pharmaceuticals, new technologies and energy.

[1] https://www.unepfi.org/fileadmin/documents/pri_english.pdf

[2]LAW No. 2016-1691 of December 9, 2016

[3] LAW No. 2017-399 of March 27, 2017

[4] LAW No. 2019-486 of May 22, 2019

[5] LAW No. 2021-1104 of August 22, 2021