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PE Panorama: US a laggard on ESG

By Paul Mackintosh  
Nov 11, 2019

I’ll spare you any more bile-venting over SoftBank, WeWork and Uber for now. Instead, cast your eyes on an interesting survey from Coller Capital’s fourth annual environmental, social and governance (ESG) report.

Admittedly, much of the report is devoted to Coller’s own ESG record, underwriting its own proudly proclaimed carbon neutral status. But it did obtain feedback from 89 general partners (GPs) representing 452 funds, as well as 79% of Coller funds’ fair market value as at December 31, 2018. So it’s fairly certain that they are reasonably representative, given that Coller is a leading secondaries investor.

Some 89% of respondents have an ESG policy in place, and the 11% who don’t, manage less than US$5 billion. Almost half are signatories to the United Nations-supported Principles for Responsible Investment, with sign-up highest among European GPs at 79%, followed by 36% of Asia Pacific GPs. US GPs lag at 26%, although that’s still better than just 19% a year ago.

Meanwhile, 34% of respondents are signed up to ESG principles other than the PRI, 52% of those to the American Investment Council. And 61% expect to expand the size of their ESG team, with 5% appointing their first dedicated unit. None expect to reduce ESG staff.

These and other data points mirror a pattern I’ve seen in mainstream investing: absence of an ESG component in a business or investment proposition is now seen as a competitive disadvantage. It’s surely no coincidence that the few respondents in Coller’s poll that don’t have a full ESG programme are also the smallest niche players.

Also, private equity firms, as owners of businesses, are not only in a position to drive ESG implementation at the portfolio level, but are also exposed to ESG-related requirements and regulations at the corporate level. Private status is no way for a company or its owners to evade ESG and sustainability strictures in the medium term, never mind long term, and GPs appear to recognise this, with 89% of respondents now including ESG comments in investment or exit memoranda.

There are plenty more data points to show how far US GPs are being left behind. In Asia Pacific, 81% of investment teams have had ESG training in the past 12 months. In Europe, 70% of GPs include an ESG section in their fund reporting, versus 46% in the US. And although only 5% of respondents won an ESG award in the past year, all of those were either European or emerging-markets investors.

And here’s another chunk of data for those US laggards. President Donald Trump has just served notice that the US will withdraw from the Paris Agreement on climate change. But this depends on the outcome of the 2020 presidential election. Trump-backed candidates have just tanked in formerly red states. The president is being impeached. Which horse do you want to back?