GPs and LPs join the dots on ESG integration in the venture and buy-out worlds.
The take up of ESG by private equity (PE) firms has been one of the success stories in recent years. It was only in 2009 that some of the world’s biggest signed up to a set of voluntary ESG investment standards drawn up by the Washington-based US Private Equity Council: Link
A significant number – estimated to be about 100 – have also signed the United Nations-backed Principles for Responsible Investment (UNPRI).
Yet, in a updated study by Mercer, the investment consultant, released this week, private equity managers demonstrated the highest proportion of highly rated ESG 1 and 2 strategies, indicating good ESG integration into investment ideas, portfolio construction, active ownership and firm-wide commitment to ESG issues:
The mantra has been that in private markets managers get things done on ESG because of their hands-on direction of companies.
Nonetheless, private equity has in recent years suffered from persistent allegations of asset stripping and low taxation. Most recently, critics pilloried US Republican election candidate Mitt Romney’s income tax levels as a partner at Bain Capital, the US private equity firm. As a result, PE firms are on a public relations push. Many private equity fund managers (General Partners or GPs) are thought to be planning to raise funds in the next 24 months after sitting out much of the financial crisis. ESG has become an important manager selection criterion amongst Europe’s largest institutional asset owners (Limited Partners or LPs) and allocators to private equity. It has also become an important image flag for the industry to wave. Consequently, the recent European Venture Capital Association Responsible Investment Summit in Brussels, jointly held with CSR Europe, was a good venue to take private equity’s ESG temperature.
At moments, the charm offensive in front of a significant European political audience was overt. For some in the industry, responsible investment means business-as-usual. Karsten Langer, chairman of EVCA and head of Riverside, the US leveraged buy-out firm, said the industry’s alignment of interest over the long-term already gave it a strong element of responsible investing. He said investing in small and medium-sized businesses was also implicitly responsible, although he went little further in actual ESG practice. If responsible investing is merely economic growth then few investors will claim they have much to think about. US private equity giant, KKR, is seen as a standard bearer on ESG. Its Green Portfolio Program Link , an environmental efficiency strategy at 13 companies, has, the company says, saved it hundreds of millions of dollars and significantly reduced C02, waste and water consumption. Industry observers say they are impressed with KKR’s ESG commitment. Nonetheless, the programme currently covers less than 20% of KKR’s global portfolio of 72 companies, although the firm is expanding this focus. Jacques Garaïalde, Partner at KKR, said it fully backed its ESG commitment, but offered a reality check on sustainability that chimes with many in the private equity business: “How do you know you are not damaging returns? What is the cost of ESG? We shouldn’t be naïve about this, what is the cost to employment, etc? It’s a balance we have to consider very carefully.” Garaïalde said KKR sought to avoid investing in companies where there were any risks of issues such as child labour: “We have said to some companies that we will invest in them if certain things change, but we want to see this as an outcome not as something we invest in and then work towards.”
Maaike van der Schoot Corporate Social Responsibility
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