Private equity makes limited progress on ESG promises

Private equity firms have made progress in adopting environmental, social and governance (ESG) principles in their investments in recent years, but they still find it hard to put their money where their mouth is.

A recent study by advisory services firm BDO found that nearly two-thirds (63%) of British buyout firms say they have taken ESG into account in their businesses, but only 29% of them publicly disclose their policies and progress in this area.

Globally, in 2020, private equity firms have so far raised more than $370bn in funds that integrate ESG principles into their investment decisions, according to data provider Preqin.

However, fewer than 10% of 8,810 global private equity firms, with a total of $3.4tn of assets under management, have signed up to the United Nations Principles for Responsible Investment (UNPRI), a recent survey by Institutional Investor revealed.

ESG reporting for private equity firms, such as under the UNPRI, the world’s most-recognised set of ESG principles, is still voluntary. “The idea that private assets mean little or no public disclosure on important issues like ESG is increasingly being challenged,” Jamie Austin, a partner at BDO, said.

The push for demonstrable adoption of ESG has been growing among prospective limited partners for several years, partly due to the UK Pensions Regulator’s introduction of ESG reporting requirements for trustees in 2019.

Yet, only 25% of PE firms in the UK now have a dedicated ESG team, according to the study, which analysed 100 small, mid-market and large firms.

“A manager’s ESG approach is becoming an important consideration for LPs looking to deploy capital into private equity,” Austin added.

“We suspect the next stage is that investors will not just want a commitment to ESG – they will also want tangible proof of how the private equity fund has actually delivered on that commitment.”

More than two thirds of LPs in the alternative industry (67%) consider it is important to invest capital in ESG-related funds and companies, according to a survey by consultancy firm EisnerAmper released last week.

Meanwhile, Alexandra Cichon, executive vice-president at ESG data provider RepRisk, argued that checklists used by PE firms, fail to illuminate any past risks or serve as a reality check for how companies conduct their business on the ground.

She said investors who employ granular, timely and multi-dimensional data to assess ESG factors “have seen improvements in areas such as due-diligence, monitoring and risk mitigation, so there is a great deal of potential to unlock as investing sustainably becomes ever-more important.”

Source: Private Equity News