ESG drive in full swing among private equity firms

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MBK Partners, Hahn & Company well prepared for strengthened ESG criteria

By Anna J. Park

As environmental, social and corporate governance (ESG) has been a key concept in the global business world in recent years, private equity investment is also placing more emphasis on these transformational elements.

This year is particularly expected to witness such heightened significance in the local private equity sector, as the country's major limited partners ― institutional investors who arrange and invest the capital for funds ― such as the National Pension Service (NPS) and Korea Development Bank (KDB) begin to evaluate ESG considerations as key requirements when selecting their general partners ― those responsible for making investment decisions.

KDB, for instance, plans to start giving extra points this year to the ESG efforts of private equity firms (PEFs), when selecting general partners for their policy-oriented funds. It also conducted assessments late last year on its current general partners which manage the bank's policy-oriented goals, selecting seven firms as exemplary cases. As ESG criteria have now become a key part of limited partners' assessments of the general partners, local PEFs have been strengthening their ESG-related capacities.

Actually, major PEFs have already been putting much emphasis on the ESG criteria in their investment portfolios for years now, and they have been well-prepared for the strengthened presence of ESG factors.

MBK Partners, one of the largest PEFs in Asia, signed United Nations-backed Principles for Responsible Investment (UN PRI) in 2013, becoming the first Korea-headquartered PEF to do so. The principles are a voluntary framework that incorporates ESG factors into decision-making and portfolio company ownership practices.

“Even before ESG became a buzzword in Korea, MBK Partners has been committed to the concept of responsible investment. ESG considerations are an integral part of the firm's investment decisions,” an official from the PEF said, explaining that the firm has been consulting accounting and legal firms on ESG.

The official said the key reason for the firm's early moves in the ESG realm is that the firm not only receives investments from limited partners located here but also from overseas, which have long factored in such ESG assessment when selecting their general partners. The firm set principles of ESG-based responsible investment in early 2014.

Hahn & Company, another major PEF in the country, has also been pursuing proactive ESG-principled investments in its portfolio companies. Based on the firm's general direction towards strengthened ESG criteria, it applies disparate and specialized ESG strategies for each of their portfolio companies.

A clear example of the case is the firm's acquisition of Ssangyong C&E in 2016, the country's leading cement maker. Since the acquisition, the cement maker stressed its ESG vision, expanding its business strategies in the realm of green initiatives. The cement maker not only set its target to go coal-free by 2030 as well as self-power generation projects, but also acquired waste management firms including Green Eco Solution and Green Eco Cycle as its affiliates, advancing into the eco-friendly market.

Hanon Systems, one of the PEF's investment portfolio companies, has also reaffirmed its commitment to eco-friendly operations. The global provider of automotive thermal and energy management solutions continues to develop ways to support electric vehicles as well as reduce its carbon footprint.

Like the case of Hahn & Company, market insiders said most major PEFs have been committed to pursuing ESG activities that uniquely match their portfolios, in addition to their general ESG investment goals. Yet, some also pointed out that such moves would incur extra costs for the PEFs in legal and consulting services as they try to incorporate ESG considerations into their investment decisions.