StepStone: Considering labour, land and data rights in ESG analysis

StepStone factors ESG into all investment decisions and advocates for the adoption of ESG best practices by its General Partners (GPs). Further, we have integrated human rights considerations into our ESG due diligence, evaluated our supply chain to identify levels of modern slavery risk exposure and incorporated relevant queries in our vendor due diligence. 

Why we incorporate human rights into our investment process 

A strong ESG foundation is essential for incorporating human rights into investment decision-making and asset management. Yet we have noted narrow and sometimes episodic focus areas adopted by GPs, such as diversity and inclusion, operational health and safety, cybersecurity or supply chain considerations. Further, the bulk of human rights due diligence queries in private equity have focused on ensuring supply chains are free from modern slavery in response to regulation in the UK and Australia. While a critical aspect of human rights, stopping the analysis here falls short. Applying a human rights lens to an investment highlights the importance of social issues in the company’s workforce, such as occupational health and safety and diversity. At the same time, broadening the focus to stakeholders such as customers, suppliers and community members reveals the true scope of the business and reputational risks, as well as opportunities. 

As private equity investors, we must analyse land, labour and data rights from the perspective of the rights holder. This responsibility stems from the United Nations Guiding Principles on Business and Human Rights (UNGPs), which state that businesses should have “a human rights due diligence process to identify, prevent, mitigate and account for how they address their impacts on human rights” (principle 15). Addressing human rights not only speaks to the core of our humanity as people, but also to our responsibility as investors and fiduciaries to protect, add value and maximise risk-adjusted returns over the long term. 

How we incorporate human rights into our investment process 

Due to the illiquid nature of the asset class, pre-investment due diligence is of critical importance. As such, we ask specific questions on GPs’ approaches to human rights topics. Most GPs do not have overarching policies and procedures with regard to human rights.  

Through our due diligence questionnaire, we encourage GPs to address human rights and stakeholder engagement comprehensively through their ESG policies, in addition to queries on diversity policies and modern slavery statements. 

During underwriting, we query GPs on their approach to analysing material ESG issues, and whether they systematically address specific issues such as climate change, cybersecurity, and modern slavery / supply chain. We also review critical incidents – from workplace accidents to data breaches – and the GP’s response, and have high expectations with regard to disclosure of such matters. 

Specifically for primary investments, we evaluate the GP’s ability to do quality due diligence and manage and monitor ESG risks and opportunities, including human rights issues, throughout the holding period. We assess whether the GP has identified the material issues, whether they are active post-investment and whether reporting channels are established should remediation be required. As we are going into a blind pool, we rely on case studies to understand a GP’s track record of managing such issues.  

In the case of secondaries and co-investments, we evaluate the GP’s due diligence and seek to understand their intentions to integrate management of ESG and human rights issues into 100-day plans and value creation plans. We complement this with our own analysis, leveraging the SASB materiality framework to assess whether the material issues have been properly addressed. 

Through both case study review and asset-specific due diligence, the GP is able to showcase their focus on human rights issues. Given that very few GPs have a comprehensive human rights due diligence framework rather focusing on specific issues like gender diversity or modern slavery, we have engaged with several GPs to encourage a more holistic human rights lens to investment opportunities. 

Example: Data rights considerations in a health tech investment 

Data security and customer privacy are among the most common SASB disclosure topics across all StepStone investments. How personal data is collected, managed, protected and valued is a critical component of our human rights evaluation. 

This topic is front of mind in health service and tech companies, where data privacy issues are even more pointed given the sensitivity of medical records. In a recent example, our concern was heightened due to the sensitivity of the data and the vulnerability of the populations being tracked by an investee company. Through our application of the SASB materiality framework and dialogue with our internal Private Equity Responsible Investment Workgroup, the deal team raised this issue with the GP and company management to review the appropriate policies and query about past breaches. In this case, we learned that the company employed best-in-class data security and compliance measures and had experienced no breaches to date.  

We queried the company about data privacy issues through the perspective of the rights holder: Is the company only tracking the necessary data on individuals? How is the data obtained? Can patients request to see their data or ask it be removed from the database? Who has access to the database and is any aggregated or anonymised data being sold or used for marketing or other purposes? This was a topic that the GP and management team had considered, but with a focus on regulatory requirements rather than application of a human rights framework. While it is still early days for this investment, these conversations provided valuable insights into management’s knowledge of the subject matter and willingness to work on providing the board with more transparency. We believe raising these questions deepened our alignment with the GP and company management from the outset.