Private equity ‘barbarians at the gate’ of ESG: conference report

Some of the world’s largest private equity companies, battling an image problem and a shift in market dynamics, had very warm words about incorporating environmental, social and governance (ESG) factors into their operations at a conference in London last week.

The likes of Carlyle Group and Kohlberg Kravis Roberts (KKR), with some $140bn in assets under management between them, are not perhaps best known for their responsible investing credentials. Indeed, the industry still suffers from its ‘Barbarians at the Gate’ image, a reference to the book about the huge, controversial buyout of RJR Nabisco in the 1980s. But their appearance at the PEI Responsible Investment Forum, co-hosted by the United Nations Principles for Responsible Investment, showed which way the sector wants to head.

Johannes Huth, head of European operations at KKR, called for a “fundamental behavioural commitment” to responsible investment – adding the firm has turned down deals due to ESG factors. KKR “would not turn a blind eye” to ESG transgressions such as bribery and child labour practices. The firm was preparing an ESG report to go out by the end of this year.

Carlyle principal Andrew Marino went even further, saying ESG factors provide “a limitless well of value creation”. The industry, he said, could be “a real instrument for driving ESG”.

Carol Kennedy, senior partner at leading private equity fund of funds firm Pantheon Ventures, said her firm“wouldn’t be working with general partners if we thought they weren’t responsible investors”. KKR’s Huth said the move into ESG wasn’t being driven by investors but by the private equity industry itself.

Conference chairman Donald MacDonald, chair of the UNPRI called the event – the first on private equity and responsible investment – “historic” for gathering so many senior figures to discuss ESG and private equity. But he acknowledged the sector was not managing ESG issues “as well or as consistently as it might”.

The shift towards ESG comes at a crossroads for the private equity industry in the wake of the financial crisis, with lower deal volume and fund raising and emerging legislation seeking to curb alternative asset managers.

Margot Wirth, director of private equity at the $138bn California State Teachers’ Retirement System, summed it up when she said the pendulum had swung so that general partners are now less able to “throw their weight around”.

Hermes Fund Managers’ chief executive Rupert Clarke said it was “unproven” that the private equity industry delivers risk-adjusted value added returns. He bemoaned the transfer of wealth from limited partners, the investors, to general partners.

There are 65 private equity signatories to the UNPRI with some $200bn in assets under management, MacDonald said, adding that the PRI is in discussion with the International Limited Partners Association (ILPA) on integrating ESG factors into the ILPA principles.