ESG Can Give Private Equity Firms a Competitive Advantage Among Socially Conscious Limited Partners

In the landscape of the asset management world, ESG has gone from emerging mindset to ubiquitous strategy among global investors. Socially conscious limited partners are placing a premium on corporate values and responsible business conduct while buffering against risk and ensuring positive returns.


3 September 2019

ESG Private Equity

For almost a decade, Environmental, Social and Governance (ESG) – a broad framework that looks at a company beyond its balance sheet – has become an increasingly popular ethos in the zeitgeist of the global investment market.

According to Sizing the Impact Investing Market, a report released in April by Global Impact Investing Network, over 1,340 organizations currently manage USD 502 billion in impact investing assets worldwide. Global Sustainable Investment Alliance says ESG investing in the U.S. now represents a quarter of assets under management, compared to less than 18 percent in 2014, only five years ago.

While traditional investors are laser-focused on financial performance, more than 2,450 investors and 440 asset owner signatories worldwide – including a number of limited partners (LPs) – have shifted their own framework to embrace the United Nations-supported Principles for Responsible Investment (PRI), a set of six principles that provide a global standard for responsible investing.

  • Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
  • Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
  • Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
  • Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
  • Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
  • Principle 6: We will each report on our activities and progress towards implementing the Principles.

In 2015, the UN launched 17 Sustainable Development Goals, or SDGs, that inform the ESG decision-making process. The criteria allow opportunities to be scrutinized on the merits of a company’s dedication to making the planet a better place and its ability to provide a competitive return in the future.

There are currently 232 SDG indicators encompassing a wide spectrum of issues including: gender and racial diversity, climate change, board-level responsibility, employee welfare, client relationships, sustainability and community relations.

 

PRI growth since 2006

(Above chart) PRI signatory growth since 2006

While ESG has its critics and challenges, it has undoubtedly made an impact. PwC’s Private Equity Responsible Investment Survey 2019, a survey of private equity (PE) firms and their LP investors, reveals a trove of eye-opening results by respondents that illustrate a shift in thinking among LPs. A few notable findings from the report include:

  • 79 percent of respondents have adopted a responsible investment policy
  • 81 percent report ESG matters to their boards at least once a year
  • 91 percent of respondents have already adopted or are currently developing a responsible investment or ESG policy

Growing international momentum

ESG has taken center stage in Europe. The EU issued ESG recommendations last year and is finalizing regulations. CEOs and boards of many Nordic companies have been early adopters in the effort to integrate societal impact into the corporate mission. Some of these policies stem from policy actions taken by the European Union. In the U.K., it will be a mandatory requirement for all listed companies and large asset owners to report on climate-related risks and opportunities by 2022.

While there’s less political and regulatory interest in America compared to Europe, the first U.S. congressional hearing – “Building a Sustainable and Competitive Economy: An Examination of Proposals to Improve Environmental, Social and Governance Disclosures” – was held in July by the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets. The hearing addressed a desire by some for publicly traded companies to report their business’ impact on global climate change and the risk this poses to their shareholders and the public.

Tech offers opportunity for IR and fundraising teams

Technology is playing a role in shaping responsible capital investing. Analytics as well as self-reported and public data are critical tools in the management of ESG key performance indicators (KPIs) and scoring – metrics that are used to drive investment decisions and manage risk. A cottage industry of data providers has emerged as data and analytics form a core part of the equities-investment process. While ESG is fast becoming a critical part of how many investors evaluate investment opportunities, ESG in its quantitative form is a rich data set that needs to be combined and evaluated in an overall investment strategy.

With ESG now mainstream, investor relations (IR) and fundraising teams can go to market with a point of differentiation – a competitive advantage for the benefit of the business – to meet increased demand from investors who are highly engaged and have an appetite for information.

IR teams can safely and securely share ESG information – policies, matters of governance, new hires, proxies, presentations and disclosures – with investors using Intralinks. Consistent investor communications are a way to build and maintain trust and an opportunity to articulate your ESG story. ESG-minded institutional investors tend to be focused on value creation and sustainability. That means both IR and fundraising teams can communicate clear and concise messages, from how a particular opportunity can create long-term value to how specific challenges are being met by leadership. During capital raising, ESG can be a central focus of discussion at investor days and road shows.

The spotlight on ESG will certainly grow brighter. In the coming months I’ll be attending ALTSSV 2019, ALTSTX 2019 and ALTSMIA 2019 with my SS&C Intralinks colleagues. I expect to hear and learn much about this hot topic in private equity at these conferences. What’s your prediction for ESG in 2020? Leave a comment below and share your thoughts.



Kevin Faroni

Kevin Faroni

Kevin has extensive experience in the fintech space, originally working in a startup division of the Mergermarket Group that was later acquired by Intralinks. During his tenure with Intralinks he led a team to scale a software assisting buy- and sell-side firms in their deal sourcing and deal marketing efforts, across a myriad of industries around the globe. From there he joined SS&C to form a newly created software division focused on front and back office solutions for private equity, hedge funds, venture capital, family offices and real estate funds.

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