ESG due diligence minimizes risk and drives value

The Dutch Good Growth Fund - Financing Local SMEs - (DGGF) – is an initiative of the Dutch government to stimulate entrepreneurship and create jobs in frontier markets. Amongst other things, PwC acts as the environmental, social and governance (ESG) manager, enabling the fund to maximize its impact on the ground, while keeping ESG risks at bay.

What was the problem?

The DGGF is a fund of €273 million that aims at investing in small and medium sized enterprises via intermediary funds in 60+ low- and middle income countries globally. The fund’s ultimate goal is to unlock sustainable economic development in these countries. Several countries can be described as rapidly growing emerging markets and offer many opportunities to combine social impact with commercial value creation. However, there are many challenges: environmental, human rights and labour issues are not always well regulated and patterns of corruption are common.  

Which solution was applied?

The Ministry gave PwC the mandate to ensure environmental, social and governance (ESG) risks are adequately mitigated in all DGGF deals and through the ownership & portfolio monitoring phase. We designed a methodology to conduct ESG due diligence on all financial intermediaries that enter DGGF. These are private equity firms, venture capital firms, SME banks and more. Through our diligence and onboarding, we ensure that all deals will meet the highest ESG standards, while fully understanding deal context and impact and value implications. Our role is to unearth the key risks and understand the extent to which the intermediary funds are able to mitigate them. Our due diligence goes much further than checking if an exclusion list is in place. We engage with fund managers to test how they work on ESG in practice, and whether they are capable of addressing ESG issues throughout their portfolios. We also provide technical assistance where needed, exploring how ESG creates value and is a core element of responsible investment strategies for DGGF intermediaries across diverse markets.

What was the result?

We believe that robust ESG management is a prerequisite to generating positive impact and commercial value in the target markets. Through our role as ESG manager for DGGF, all key ESG risks are taken care of – in a collaborative way with each intermediary, even in the most challenging environments and in light of geopolitical tensions.