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Pension funds eager for private equity to measure impact of ESG

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Almost two-thirds of institutional investors want to quantify the value of responsible investments in private equity but only a small minority have made attempts, research has shown.

A survey conducted by consultancy PwC among institutional investors showed while 74% stated they wanted to quantify their private equity manager’s environmental, social and governance (ESG) stances, only 19% had made any attempts to do so.

While ESG matters and the concept of responsible investing has taken a strong hold in listed asset classes, movement into the alternative space has picked up pace.

The survey showed an industry-wide ESG disclosure framework launched in 2013 was rarely or not at all used by a majority of investors, although 31% said it was regularly used.

Other findings saw 83% of investors citing fiduciary duty as a main driver for a responsible investment stance, alongside reputational risk (53%) and corporate values (53%).

Over 85% said responsible investment added financial value within private equity, as 71% would decline an investment opportunity based on an ESG assessment.

A fifth of investors have withdrawn from an investment or withheld capital based on an ESG assessment decision.

Malcolm Preston, PwC’s lead of global sustainability said the survey showed it was clear some discomfort remained between investors and private equity managers on how to achieve responsible investment goals.

“Their expectations and approaches are yet to align,” he said.

Preston said it would be easy to suggest collaboration between investors and managers would solve the disconnect, and increase mutual understand or avoid onerous data collection exercises, but the disclosure project was designed to do this.

“[Investors said] they were generally clear on what they wanted from [managers] but there was little sense the disclosure framework is the final piece of the information jigsaw,” he added.

“Developing a process that works for everyone is still very much work in progress,” he continued.

“To many, such initiatives may feel idealistic or like an onerous layer of administration, but to an industry where there is a growing belief responsible investment is a driver of value, they are not to be taken lightly.”

The survey question 60 global institutional investors, including the UK’s two largest pension funds, Sweden’s AP funds, and PGGM and APG from the Netherlands.

PwC director, Phil Case, said the survey highlighted the need for more active integration and interrogation of ESG in private equity,

“It could shift the power of institutional funding from being a threat of withdrawal to a force to embed an orderly, sustainable transition to a low-carbon economy, not only setting the timeline for change, but securing vital funding for it too,” he added.

Despite the growth in ESG and responsible investment concerns in private equity, research from Mercer and LGT Capital Partners found this was not translating into the hedge fund space.

According to the pair, an overwhelming majority of asset owners considered ESG when selecting private equity, property and infrastructure managers - but they fell to being the least important issue for hedge funds.

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