IPE asked three pension funds how private equity managers are progressing in terms of integrating responsible investment
Shades of grey
It is true, to some extent, that private equity managers are lagging behind industry standards when it comes to the adoption of ESG criteria within their strategies. There are some regional differences. US managers are clearly behind, whereas European managers are more aware of these issues. But generally, the private equity sector is lacking compared with listed equity managers.
I do not think that the private equity sector lags behind because it is less transparent. It has probably more to do with the size of the fund manager and the companies they invest in. In the private equity sector, fund managers and portfolio companies tend to be smaller and lack the resources to integrate ESG criteria within their operations.
However, the sector as a whole is moving towards greater ESG integration. The fact that investors like ourselves ask prospective private equity managers about their ESG policies contributes to the development of the industry.
I am somewhat sceptical about the evidence that ESG integration necessarily adds value. From our perspective, ESG is about raising awareness and contributing to making the world a better place. The days when shareholder value was the sole focus are gone. Now businesses need to be aware of other stakeholders too.
To us, ESG investing is a genuinely qualitative approach within private markets More often than not, there are no black and white decisions. As an investor, you have to dig deep and make your own judgement about individual issues. We have rejected proposals by our private equity managers to invest in companies dealing with weapons or fracking on ESG grounds. Such decisions have required lengthy and in-depth discussions. That is why we now have someone in our investment team who dedicates half of their time to ESG analysis.
Stronger ‘G’ credentials
Our newly-adopted responsible investment policy requires us to discuss ESG with private equity managers. ESG considerations now form a key section of the due diligence questionnaires we put to our prospective managers.
I suspect private equity managers have perhaps been less public about what they do in terms of ESG. It might be easier for listed equity managers to show that they are offering green-type investments. It is also harder for managers, who might have specialised in certain sectors, to offer green investments.
Probably, many private equity managers are behind listed equity managers on the face of it, because of their boutique nature. But I would say that it is because their approach is different.
I find that private equity managers are cognisant of where the industry is going and are prepared to listen to investors. Their focus is on what they can do to directly influence the businesses they invest in and still meet the returns that they are targeting.
The private equity sector probably scores higher in terms of the ‘G’ aspect compared with many public managers. I certainly feel that, in terms of transparency of information, private equity managers are prepared to tell you in great detail what their plans are for the companies they invest in. In some respects, you get more insight in the private companies you invest in compared with public companies.
Increasingly, we see private equity funds that are focused on impact investing, especially with regard to climate change.
Work still to be done
Private equity managers have much work to do in terms of integration of ESG criteria. This is partly due to the fact that there are fewer regulatory requirements in terms of reporting compared with listed equity. But it is in the nature of private equity to focus on smaller, less well resourced businesses, in order to make them grow. So in a sense, it is a sector that is naturally suited to the integration of ESG criteria, because is orientated towards long-term investment approaches aimed at growing the value of enterprises.
Various elements are pushing private equity managers towards integration of responsible investment approaches. In particular, these are the fact that ESG factors can contribute to value creation and the need to adapt to investors’ expectations.
When we analyse private equity managers, or managers of private assets more in general, we check whether they are signatories of UN Principles for Responsible Investment and whether they have an explicit ESG policy. Many managers have signed up to the UN PRI in recent years and have implemented ESG policies. We have engaged ourselves with managers, arguing that having an ESG policy brings advantages in terms of market positioning and value creation. Obviously, not all private equity managers are prepared to tackle the ESG parts of our in-depth due diligence questionnaires.
Nearly 40% of our total assets are invested in strategies or assets that comply with an ESG policy, whereas we have €3.5bn of assets invested in pure ESG strategies.
Interviews by Carlo Svaluto Moreolo