November 2020
AAM Magazine
November 2020
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PE Panorama: LPs are willing but PE industry is weak on ESG

ESG, private equity
By Paul Mackintosh   
November 23, 2020

Data provider Preqin’s recent launch of a solution to track and compare environmental, social and governance (ESG) across alternative assets should underline how significant this issue is becoming for the private equity market. And a report just released by UK private equity-focused consultancy Brackendale Consulting emphasises exactly how important a priority this is for limited partners (LPs) – and how suspicious they are of private equity firms’ current levels of engagement with ESG concerns.

The inaugural Brackendale Private Equity ESG LP sentiment survey polled a cross section of LPs in the West, including pension funds, insurance companies, family offices and funds-of-funds, on five key questions. On a scale of one to ten, respondents rated the question of how important ESG was to their investment decision-making at 7.5. They provided a slew of answers as to why, all worthy of attention from general partners (GPs).

Pension funds cited pressure from pension holders and regulators alike. Others said ESG practices mitigated risk, built better companies, and delivered stronger returns; risk assessment, not least reputational risk, was a prevalent consideration. Even family offices, which are less exposed to public sector and popular pressure, said ESG is “a crucial way of generating sustainable value in the future”.

LPs’ answers to the question of which component of ESG mattered most to them was nuanced; they said it depends on the particularly investment or sector. However, they want GPs to have a proper formal policy in place for integrating ESG considerations into their investment process, and communicating and reporting back on this to LPs.

Asked what constituted a good ESG report from their GPs, LPs overwhelmingly stressed key performance indicators, and combinations of quantitative and qualitative reporting. Asked what they had seen in such reports that didn’t impress them, they highlighted, above all, superficiality, instancing lack of detail, a box-ticking approach, form over substance, general statements not backed by evidence, and an absence of data. LPs also complained of evident greenwashing, whitewashing, lack of firm relative measurements of impact, and absence of overall top-level policy commitment to ESG reporting.

Just to make sure that any wilfully ignorant GP can’t avoid the gist of this analysis, let me make it crystal clear: LPs are ready, willing, able, and even compelled to incorporate ESG considerations into their investment decisions. They want to see the funds they invest in accommodate those concerns, and preferably to be equally committed to ESG priorities.

Instead, right now they’re seeing an awful lot of obfuscation, evasion, vagueness, indifference and outright greenwashing.

This isn’t to say that the entire private equity industry is cynically indifferent to ESG concerns. But it’s doing a pretty poor job of keeping up with its most immediate clients in this regard, never mind public opinion and global policy as a whole.