Welcome to ‘In the Hot Seat’, a fortnightly series where we tackle some of the biggest questions facing sustainability professionals across a range of industries. We’ll also explore what sustainability means and how it is interpreted across different sectors and geographies.
This week, Zara de Belder, Head of Maitland/AMO Sustain, caught up with Jovana Stopic, ESG Manager at IK Investment Partners (‘IK’), a Pan-European private equity firm focused on investments in the Benelux, DACH, France, Nordics and the UK.
1. The latest IK UN Global Communications on Progress Report mentions that IK will launch a new climate change risk assessment tool this year. What are the challenges when analysing transition and physical risks?
Climate change risk analysis is a very complex process with many elements that need to be accounted for – the physical risks and the knock-on effects of these risks, policy changes, reputational risks, liabilities, changing consumer preferences, new technologies, changes in energy and fossil fuel prices, as well as much more. Given the magnitude of the climate change issue, all sectors will be impacted, but this is likely to happen in different ways.
At IK, we are continuously evolving our environmental, social and governance (ESG) approach and an important component of this has been to better integrate climate change considerations throughout the investment process. To assist our Investment Teams in identifying climate-related risk and opportunities in the pre-investment stage, we have been focusing on developing a high-level tool that captures the range of future possibilities across sectors in which IK invests.
Physical risks are assessed using a bottom-up approach where we look at the geographical reach of the value chain, as well as the sector dimension to the physical risk assessment, looking at the risk exposure of a sector in general. For example, a sector such as agriculture is likely to be more exposed to physical risk compared to asset-light services, regardless of the value chain. Transition risks are assessed using a top-down approach, looking at sector and industry-specific risks which the target company is exposed to.
2. Limited Partners are increasingly interested in how General Partners engage with portfolio companies on ESG issues, throughout the investment lifecycle. Can we expect Limited Partners to start asking questions about how General Partners manage their own, internal material ESG issues?
These questions are already being asked. Limited Partners have been taking a keen interest in how diversity topics are being addressed at the General Partner level, in governance arrangements, but also with respect to the implementation of environmental initiatives such as the monitoring of greenhouse gas emissions.
3. You have a particular expertise in human rights. What are the biggest risks for companies when considering human rights issues?
The biggest risk for companies is to hold the assumption that human rights have nothing to do with their business or that they are not in a position to address human rights – for reasons such as the size of the company, the sector they are in, the fact that they operate in a highly regulated developed market, or that there is no business case for them to care about human rights. All businesses, including small and medium-sized enterprises (SMEs), can have adverse human rights impacts.
Even when the intention is there, understanding human rights impacts and ensuring respect of internationally recognised human rights can be challenging. To start with, companies could focus on salient human rights issues – the ones at risk of most severe negative impacts. Policies and processes appropriate to a company’s size and circumstances should include a human rights due
diligence process that includes business risks as well as the risks posed by the business. There will naturally be some overlap. A serious violation of human rights could at the same time impact the victim and the reputation of the company.
The evolution of the business and human rights agenda has been incredibly dynamic. The UN Guiding Principles on Business and Human Rights (UNGPs) provides the guidance on business responsibility to respect human rights, and is having a remarkable impact on companies, standard setting bodies and regulators. The UNGPs have been referenced in the draft Regulatory Technical Standards, which supplements the Sustainable Finance Disclosure Regulation, and the UN PRI has also announced a fi ve year programme on human rights, which will include human rights questions into its reporting framework by 2022. This may bring many more financial actors onboard, accelerating the UNGP uptake even further. Developments in this space is something I keep a close eye on and find very interesting.
4. If you had one piece of advice for someone considering a career in responsible investment, what would it be?
Responsible investment roles are varied and are open to professionals with different backgrounds – from investing and finance, to accounting, law and environmental sciences. A career in responsible investing will keep introducing you to new and exciting challenges and if you are passionate about sustainability, it is very rewarding. If you are keen to continuously improve your understanding of the interplay between finance and sustainability and have just the right amount of patience, candour and confidence, then I’d encourage you to seek relevant opportunities – it’s
such an exciting time to embark on a career in responsible investment!
5. Finally, what does sustainability mean to you?
Living and working responsibly by being mindful of the impact of actions on the people, communities, and the environment around us, both now as well as in the future.