Survey Shows Institutional Investors Are Interested in Quantifying PE Managers ESG Stances


June 3, 2015

Consultancy group PwC conducted a survey among institutional investors and made some interesting findings. A majority of institutional investors are interested in quantifying the value of responsible investments in private equity and see where PE managers stand when it comes to environmental, social and governance (ESG) issues. Despite the interest, very few investors still choose to seek answers to these questions.


Participants of the Study
PwC’s study looked at Limited Partner attitudes towards the ESG issues. Most of the respondents were therefore institutional investors providing capital to private equity industry. The group included asset management investment companies and pension investors such as UK Universities Superannuation Scheme, Swedish Pension Funds and the California State Teachers Retirement System.


The total amount of respondents stood at 60, with respondents coming from 14 different countries. In total, the investors had allocated $500 billion to private equity fund managers or General Partners.


The biggest groups of respondents were pension funds and investment managers, which are typically more inclined to consider responsible investment approaches.


The Survey’s Findings
ESG matters have become increasingly relevant in the world of private equity, with many investors and managers starting to consider the issues. The PwC survey strengthened this view, as it found 74% of respondents stating they wish to quantify their private equity manager’s ESG stances.


In terms of responsible investment stances, the respondents overwhelmingly stated that fiduciary duty is the main driver. This was followed closely by reputational risk and corporate values, with 53% of respondents highlighting these as important drivers for a responsible investment stance.


Institutional investors are increasingly seeing the benefits of using ESG matters as part of a successful investment strategy. More than 85% said responsible investment could add real value to private equity investing. Furthermore, 71% of investors said they could potentially decline an investment opportunity if ESG assessment wasn’t up to standard.


In fact, fifth of the interviewed institutional investors had previously withdrawn from an investment or withheld capital as a result of an ESG assessment.


Plenty of Interest, But Lack of Appetite to Demand Answers
Although the PwC study highlights the interest institutional investors have towards ESG matters, there’s still a lack of demand for implementation. While majority of investors are in favour of quantifying the manager stances, only 19% of investors have actually attempted to do so.


Although private equity has an industry-wide ESG disclosure framework established, majority of investors don’t take advantage of it. Around 31% of the respondents said they regularly use the framework, which was launched in 2013. 47% of investors say they never use the framework.


Malcolm Preston, PwC’s lead of global sustainability, told Investment & Pensions Europe the existing framework needs to be worked on to make sure investor interests are achieved. “Developing a process that works for everyone is still very much work in progress. 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,” Preston told the paper.


Creating a Better Framework
The most recent survey shows private equity industry has managed to increase its use of responsible investment standards ever since the financial crash. But the biggest problem still seems to be a lack of comprehensive and simple framework, as well as measures to effectively implement it.


Furthermore, some investors also told the survey exiting a fund that doesn’t have proper ESG implementation could be costly, leading many to keep their assets intact even if they aren’t happy with the fund’s ESG implementation.


For the framework to work better, some more work needs to be done. Part of it is implementing better strategies, but also making sure it is easier for institutional investors to demand the use of ESG framework without it adding up the costs.


The Financial website quoted Phil Case, director at PwC, saying, “We need to see more active integration and interrogation of ESG matters in private equity investment. 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”.


Hedge Funds Even More Behind
Private equity has, despite some of the problems, seen an increase in ESG implementation and responsible investment strategies are on the rise. Although there is work to be done, private equity could lead the way when it comes to other asset classes and ESG matters.


Mercer and LGT Capital Partners recently found on a similar study that hedge funds have not taken the ESG issues on board. In fact, ESG factors are the least important factor when hedge funds are concerned.


Whereas 88% of private equity investors said ESG matters are considered, to some extent, when appointing managers, only 7% of hedge fund investors felt it was a significant concern.


Global Context
Furthermore, the PwC study looked at institutional investors and private equity in Europe and North America, which are region that have been at the forefront of ESG matters. But slowly there is more understanding of responsible investing elsewhere as well.


India’s Economic Times interviewed PwC India’s Sanjeev Krishan, who told the newspaper, “Interestingly many non-European investors are taking this seriously, and while most realise that emerging markets like India are only warming up to the concept, this awareness will definitely help over a period of time.”


Furthermore, the global law firm King & Wood Mallesons wrote recently in Lexology that Asian private equity markets, especially, are increasingly focusing on ESG matters. “More sophisticated LPs are pressuring GPs to adhere to sound ESG principles and invest responsibly or face losing the relationship and ultimately, their commitments,” the firm’s analysts wrote and continued, “Incorporating ESG into existing practices will undoubtedly be difficult, but may be necessary for Asia-based GPs to stay competitive with their peers amongst more selective investors.”


Overall, ESG implementation in the private equity sector seems to be moving into the right direction. Investors are also becoming increasingly aware of the benefits, which is likely to enhance co-operation and implementation.


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