”Our role as a long-term shareholder is to foster growth that is both sustainable and shared by all involved.”
At Ardian, we have always recognized that our responsibilities extend far beyond creating financial value. This is why, over the last decade, we started to develop and implement our approach to responsible investment based on our conviction that excellent Environmental, Social and Governance ("ESG") practices are highly effective tools, both to improve the performance of our investments, and to ensure we have a positive impact on our stakeholders and the wider communities in which we do business. Above all, Ardian takes a practical approach, identifying concrete steps that will make a measurable difference to the results we achieve and the benefits that flow from them.
The value that sits at the heart of Ardian’s approach is sharing. We believe in shared ownership, shared responsibilities and shared rewards. All employees must contribute if a company is to create lasting value, and so it is obvious to us that they should receive a share of the value that they have helped to create. This is why we pioneered the practice of sharing up to 5% of the capital gains we achieve on exit with the staff of those companies. Since 2008, 7,800 employees from 14 companies have shared a total of €17 million in this way. We do not do this in order to conform to some external benchmark for Corporate Social Responsibility, but because we think this is the right way to do business. Shared efforts should lead to shared rewards.
For the same reason, I am proud to say that within Ardian, we have extended the “Intéressement et Participation” profit sharing scheme, which is mandatory for our French company, to all Ardian’s subsidiaries around the world, giving every member of our staff the right to share in our profits every year.
The creation of Ardian in 2013 gave us another important opportunity to put our belief in sharing into practice. We invited our staff to become co-owners of the new management company and we were delighted that 80% of them took advantage of the opportunity. Today, Ardian is majority-owned by its managers and employees. This helps to strengthen our corporate culture and gives us all a powerful shared interest in upholding the company’s guiding values of Excellence, Loyalty and Entrepreneurship. Naturally, what is good for us is also good for the companies in which we invest and we have encouraged them wherever we can to allow their staff to become shareholders and co-owners.
I am also very pleased that Ardian’s dedication to achieving concrete results through our commitment to responsible investment has enabled us to start demonstrating the impact of specific sustainability initiatives which we have pursued with our portfolio companies on their financial performance. We believe we are one of the first private investment firms to present clear evidence of this kind and we intend to continue this work and extend its scope.
There is much still to do, however, and public expectations of our industry will become steadily more demanding. We will continue to respond by promoting our vision of shared commitments and shared rewards within Ardian and its portfolio companies, as well as being a public advocate for responsible investment practices across the private investment industry and the financial community.
Read more”Our experience proves that responsible investment can both improve financial performance and bring big extra-financial benefits, and so help us build better and more sustainable companies.“
Why is Ardian putting so much energy into its Responsible Investment activities now?
We have been developing and refining our approach since 2008 and all our experience so far proves that these factors can help us to achieve better financial performance and create sustainable value over the long term. Our strategy is to transform the companies that we invest in to make them more successful, and sustainability initiatives such as improved Human Resources practices, projects to improve energy efficiency and reduce waste, and the development of environmentally friendly goods and services can all contribute to that goal. One big step forward recently was that we are now able to demonstrate in concrete terms the difference that these initiatives can make to the financial performance of our investee companies, which is an important milestone. Meanwhile, at the corporate level, we can see that investors are demanding to know more about the firms that are managing their money: rating agencies are now publishing ESG performance rankings on thousands of mutual funds. Therefore, we see strong responsible investment practices coupled with high levels of transparency as important ways for us to sustain Ardian’s growth and success into the future.
What is distinctive about the way Ardian practices responsible investment?
If you look at our history, you can see that our approach has always had its roots in our work as investors. It is a pretty business-oriented approach, if you like, and this is why our very first step was our commitment to share gains on our exits with staff at portfolio companies. This commitment is a very powerful lever for aligning interests with our portfolio companies and their employees but it is still very unusual. Since then we have continued to emphasize the principle of profit-sharing, both within Ardian and with our portfolio companies, but we have also gone much further and pursued a wider range of responsible investment activities. But because we take an investor’s approach to this whole area, we are always concentrating on practical, concrete initiatives and aiming to measure the results as precisely as we can. Last year for the first time we shared the results of ESG evaluations of two of our Mid Cap Buyout portfolio companies at an industry event. Both these companies had achieved big financial benefits as a result of specific initiatives, demonstrating how responsible investment enables us to align our financial goals with our wider, non-financial goals. Good practice is absolutely compatible with financial success.
Read more”By supporting companies’ sustainable growth, we help to create jobs, we improve the infrastructure that the whole community relies upon and we deliver value that can be shared.”
How long have you been focusing on ESG issues within Direct Funds?
Ardian made a big public commitment to the principles of responsible investment back in 2009 when we signed the UN Principles for Responsible Investment, and that was also the year we commissioned our first external extrafinancial review of companies in the Mid Cap Buyout portfolio. Over the past seven years we have come a long way, both in the knowledge we have developed of effective ESG practices and in the experience we have built up. We now know how to implement initiatives, how to conduct monitoring and we know the results that we can achieve. So if people today ask me whether we see benefits from integrating responsible investment principles into our investment processes, I tell them that we started to answer this question seven years ago and that there is absolutely no doubt in our minds about the benefits: it is a vital part of our approach to creating value.
What concrete results have you been able to show from your work on responsible investment issues?
It has always been important for us to develop ways to measure and benchmark our results. Over the past few years we have done a lot of pioneering work with the management of companies in our Direct Funds portfolios that is now allowing us put hard numbers on the results we are achieving – and the numbers are strong. At times even, we have been surprised by what we have found. Companies such as Novacap and Fives have shown big benefits from specific sustainability initiatives, and we are now confident in sharing these results with external audiences because we believe they make the case for responsible investment practices very powerfully. Remember, these are both industrial companies in our Mid Cap Buyout portfolio that afford quite complex conditions in which to apply sustainability principles, with multiple areas to monitor and address, operations in a wide range of countries with different laws and guidelines, and so on. These exercises have taught us a lot, and have also been very important in showing our management teams that sustainability initiatives produce tangible financial value.
Why do you want to share Ardian’s experience with a wider audience?
Our job is to support companies and enable them to grow. By doing that, we help to create sustainable jobs that our societies need, we improve the infrastructure that the whole community relies upon and we deliver value that can be shared. And at the same time, our investments help to secure the financial wellbeing of the savers whose money we invest. We believe very strongly that the private investment industry can have a positive impact on the economy and on society, but we also realize that a lot of people do not yet fully understand the contribution that companies like Ardian can make. This is why we feel that it is very important to make sure people understand the responsible approach we take to investment, and so we want to talk more about our own experience and take a leading role in encouraging the private investment industry to become more active in this area.
Read more”GPs that score best against our responsible investment benchmarks are also the best performers in terms of financial returns.”
How do you integrate responsible investment into the Funds of Funds operation?
Because Ardian has a single CSR team covering both our Direct and Funds of Funds investments, we have a very good understanding of the practical challenges that GPs in our Funds of Funds portfolios face as responsible investors because we face those same challenges ourselves in our Direct Funds portfolios. In Funds of Funds, we have developed an internal scoring system that we use as part of the decision-making process when we look at new investments, and we assess the responsible investment performance of GPs through our annual monitoring survey. We have just carried out this survey for the fourth time and I am pleased to say that a large majority of our portfolio by NAV is managed by GPs that score three or four stars out of four on our benchmark. On the other side, we are also developing the way we report on responsible investment to the LPs in our Funds of Funds. We now include a section on how the GPs in our Funds of Funds portfolio are performing as part of the management reports we send to investors. We have large LPs in our funds that ask very detailed questions about our responsible investment practices and performance; as a management company we have to satisfy their due diligence, so it is only natural that when we act as an investor in other firms’ funds we should be rigorous in the same way.
Can you point to a link between responsible investment performance and financial returns in the Funds of Funds business?
Although we cannot quantify the link definitively, we can see strong evidence that it exists. The results of our annual surveys show that the GPs that score best against our responsible investment benchmarks are also the best performers in terms of financial returns. As I say, this is correlation rather than causation, but we believe that it is significant and that it makes sense. Achieving good performance in this area is a question of discipline and rigor, and we believe that good practice here will tend to indicate a high level of professionalism and a strong focus on improving performance in other areas as well.
Is it important for Ardian to remain a leader of the sustainability movement in private investment?
We are very clear that excellence in responsible investment is no longer optional – it is a must. We have to keep widening the scope of our activities and be as clear as possible about the steps we are taking. The whole industry is moving in this direction now and so it is becoming more and more important to be able to demonstrate that we are actively addressing the responsible investment agenda and that it is an integral part of the way we do business. We have been saying for a long time that our work is about more than just financial returns – I think that Ardian has been quite proactive in this area, which is good. But there is plenty more for us to do.
Read more> We began this journey eight years ago.
> We believe it to be integral to our approach to creating value.
> We published our formal responsible investment policy in 2016, detailing how it is incorporated into all our activities and every part of the investment process.
> Where possible, the investment team seeks to take a seat on the board of each portfolio company in order to monitor progress, and to support and encourage management to improve sustainability policies and practices.
> We share sustainability best practices and knowledge across our portfolio companies and funds.
> We engage with portfolio companies and GPs on material topics.
> We are continuing to develop our reporting on sustainability, to provide them with the highest quality information possible.
> In 2016 we reported to LPs on the sustainability performance of 36 portfolio companies, representing two-thirds of the financial exposure of Ardian’s Direct Funds.
> We also report on sustainability to LPs in Ardian’s Funds of Funds
> In 2015 we provided Advanced Responsible Investment training sessions for investment teams: 42 analysts, investment managers and senior investment managers from direct teams in Paris, Milan and Frankfurt took part.
> Our Corporate & Investment Responsibility Intranet promotes engagement and discussion. The site contains specific information to support staff in each area of Ardian’s investment activity.
> Since 2008, we have distributed 17 million euros of capital gains on exits to 7,800 employees from 14 companies.
> We have extended our French “Participation and Intéressement” profit-sharing scheme to include our global workforce, giving every member of staff an equal share of our profits every year.
> At the end of 2014, 17,200 jobs were created during the period of detention in portfolio companies in which Ardian had more than 5% of the capital.
> We have put in place an anti-discrimination and diversity policy with staff training sessions.
> We have appointed an Equal Opportunities Officer.
> Under our Generational Contract Agreement, every employee under 26 receives mentoring from a senior colleague.
> 55% of Ardian is owned by its staff, some 80% of whom are shareholders in the management company.
We promote employee shareholding amongst the companies in which we invest.
> The Ardian Foundation helps talented young people from underprivileged backgrounds to achieve their educational potential by providing financial support to help with their accommodation and living costs while they study.
> The Foundation provides one-to-one mentoring for each beneficiary from a dedicated member of Ardian’s staff. Around 100 Ardian employees now serve as mentors.
> We currently support around 120 young people at universities in France, Italy and the USA, as well as younger school pupils in China.
> Ardian adopted its Internal Charter on profit-sharing in 2008, committing it to share up to 5% of the capital gains on exits from portfolio companies with the employees of those companies.
In 2009 Ardian signed the United Nations Principles for Responsible Investment (UNPRI), which sets out six pledges on sustainable investment practices.
> The UNPRI gave Ardian a score of A+ for its global Environmental, Social and Governance (ESG) policy, versus a median score of B, in 2015. We scored A+ for our ESG performance in Direct Funds and Infrastructure, and A in Funds of Funds, compared with a median score of B.
> In order to contribute to COP21’s ambitious targets, in November 2015, Ardian was one of five founding French Private Investment GPs which launched Initiative Carbone 2020 (IC20). This commits each signatory to measure the direct and indirect carbon emissions majority-controlled portfolio companies by 2020 and to pursue efforts to control and reduce these emissions.
> In an effort to encourage and structure dialogue between GPs and LPs regarding ESG considerations, Ardian is leading a working group within the AFIC (French Private Equity Association) on the future of ESG Reporting within the Private Equity Industry.
> We have implemented policies on energy efficiency, recycling, use of video-conferencing to reduce business travel, and take environmentally-friendly taxis across all 12 of our offices around the world.
> We regularly take part in initiatives led by the UNPRI to develop and promote key guidance on applying the principles of ESG within private investments.
> We contributed a case study to Integrating ESG in Private Equity: A Guide for General Partners (2014), and shared our insights and experience to help produce the Limited Partners Responsible Investment Due Diligence Questionnaire (2015).
> Ardian is also a member of several other organizations that have developed their own ethical principles and rules, including Invest Europe and AFIC which regularly organizes roundtables and debates on responsible investment.
Ada Cosmetics is a leading supplier of guest toiletries and cosmetics to independent hotel chains and cruise ship operators. Based in Kehl, Germany, but with significant operations in the UK and Scandinavia, the company has worked for several years to reduce the environmental impact of its products and packaging, and to meet growing demand from customers for its Green Product ranges, which combine environmentally friendly ingredients with fully recyclable packaging.
The company has made big advances in moving to environmentally friendly packaging for its Green ranges, using polyethylene terephthalate (PET) for bottles and containers, and developing dispensing systems that are not only recyclable but also minimize waste from each use, ensuring its products last longer.
CLH operates the largest network of pipelines and storage facilities in Spain for refined oil products. Given the hazardous nature of the liquids it handles and the high potential impact of spills, the company applies stringent environmental controls and policies across all areas of its operations. It has adopted a Pipeline Integrity Plan based on the American Pipeline Integrity regulation, which is one of the strictest in the world. CLH calculates environmental performance indicators every quarter and reports them to the Board.
CLH’s greenhouse gas (GHG) intensity is relatively low compared with other companies in the energy sector. In 2013 its GHG intensity in the activities under its direct control (Scopes 1 and 2) was well below that of equivalent pipeline operators in North America. In terms of tonnes of CO2 equivalent per € of revenue generated, CLH’s GHG intensity was 19 times lower than the industry average.
CLH has earned the Silver Class Sustainability award from RobecoSAM, an international investment company focused on sustainability, coming second of 16 companies in the Oil & Gas Transportation category worldwide and receiving one of only 54 Silver Class awards among 3,300 companies.
Ardian carried out its first ESG Vendor Due Diligence review in 2013, in the lead-up to our exit the following year from DIANA, a company acquired in 2007. Over the seven years of Ardian’s ownership, we had performed four ESG reviews of DIANA but we believed that a dedicated review as part of our Vendor Due Diligence would not only produce interesting results but would also add value to the exit process.
One of the main goals of our ESG program with DIANA – strongly supported by its employees – was to achieve a zero work accident rate. Over successive annual ESG reviews, we showed that:• The accident rate fell on average of 13% per year between
2010 and 2013 despite the doubling in staff numbers over that
period.
• In 2013 the number of accidents requiring staff leave was less
than one-fifth of the sector average.
• The rate of serious accidents fell by two-thirds from 2010
to 2013.
• The rate of absenteeism at facilities in France fell 25% a year
over the same period.
The ESG exit review allowed us to assess the non-financial benefits of the initiatives we had pursued during our ownership and to measure progress against our key targets. The results of this exercise provided concrete evidence of the value of these initiatives, prompting two potential buyers to request interviews with the ESG consultant that had carried out the Vendor Due Diligence.
In light of these findings and in line with Ardian’s commitment to the UN Principles for Responsible Investment, we shared our experience by contributing to a case study on the Guidance Document for the Limited Partners’ Responsible Investment Due Diligence Questionnaire, published by the UNPRI in 2015.
The case study explained: “Ardian believes that ESG integration in portfolio companies should be results-driven – and results are only truly recognized at exit. By conducting an ESG Vendor Due Diligence, Ardian is able to communicate the value of ESG integration in practice, beyond goals and action plans.”
We now carry out ESG Vendor Due Diligence reviews whenever we believe it will benefit the exit process.
In 2015 Ardian ran a pioneering project to examine the impact on profitability of specific ESG programs at two companies, Novacap and Fives, which have best-in-class ESG practices. The results demonstrated that ESG initiatives at both companies led to material gains in revenues and Ebitda.
This is the first time that such detailed links have been shown between ESG initiatives and financial performance. Ardian intends to extend its leadership in this area of research during 2016 and beyond with further projects to evaluate the financial benefits of specific ESG projects.
For Fives, an industrial engineering group in the Mid Cap Buyout portfolio, the number of resignations was a major concern. To address the level of staff turnover, the company implemented a series of initiatives, including efforts to improve retention of people.
Ardian assessed the costs linked to voluntary departures that were avoided as a result of the company’s initiatives and concluded that savings in 2014 amounted to more than €400,000, demonstrating a strong link between improvements in ESG policies and value creation.
At Fives, we also assessed the results of the company’s “Eco-design” program, which consisted of six products carrying the label “Engineered Sustainability”. This generated revenues of more than €48m in 2015, establishing again the link between ESG policies and value creation.
At Novacap, a program to reduce work accident rates across company facilities resulted in a reduction of 75% during Ardian's ownership. Over the same period, the company’s headcount tripled, from 500 to 1,600. The reduction in working hours lost due to accidents represented a major improvement in employee working conditions and produced cost savings worth more than €500,000 per year.
> A large and growing percentage of our Funds of Funds portfolio is managed by GPs that score highly on our Responsible Investment Benchmark:
> 61% of the portfolio by NAV is managed by GPs that obtained 3 or 4 stars in our ranking. This is up from 54% in the previous survey.
> Of the 81 GPs that took part in our two most recent surveys, 59 (73%) achieved a stable score, 12 (15%) improved their ranking and 10 (12%) received a diminished score.
> Breaking the scores down, our results showed that:
> 51% of our portfolio by NAV is managed by GPs that rank in the top quartile for their performance regarding their corporate commitment to ESG, with another 11% in the second quartile
> 41% of our NAV is managed by GPs placed in the top quartile for their commitment to applying responsible investment practices during their own investment process, with a further 18% in the second quartile.
> We found a strong link between the volume of assets that GPs manage and the scores they obtained on our ESG Benchmark:
> 77% of GPs managing more than $25bn scored 3 or 4 stars. No GP scored 1 star.
> Among the smallest GPs – managing $1bn or less – there were no 4-star ratings and 18% scored 1 star.
> Our results show a correlation between high responsible investment ratings and superior financial returns*:
> 56% of GPs that scored 4 stars on our Responsible Investment Benchmark manage funds with Outstanding financial performance.
> Among funds that produced Poor financial performance, 31% obtained a 1-star rating. This category has the highest proportion of funds with weak responsible investment scores.
> 40% of GPs that assess environmental, social and governance issues during this phase carry out dedicated ESG due diligence.
