Seven Key Trends Shaping ESG

January 30, 2018 | Contributed By: Graeme Kerr

From climate change to human rights, PEI’s Graeme Kerr highlights the issues driving the ESG agenda at private equity firms.

There is a quiet environmental, social and governance revolution going on among general partners. That was apparent from a recent survey of GPs by Capital Dynamics, which found that 28 percent of GPs said the potential for high returns was one of the top three drivers for the adoption of a responsible investment or ESG approach.

The implication was clear. From being regarded as an optional extra for the more socially conscious funds, ESG has risen up the private equity agenda to the point where it is seen, arguably, as a fundamental driver of better returns. A value creator in its own right.

That is reflected at the UN-supported Principles for Responsible Investment, where private equity managers are the largest single group of asset managers among the more than 1,800 signatories: “GPs have historically looked at ESG risks in their investments, but they are responding to LP pressure to demonstrate how they are doing this in a systematic way and with accountability,” says Fiona Reynolds, managing director of PRI. “New ESG issues continue to emerge all the time.”

So, what are the key themes driving responsible investing strategy across the private equity industry? We canvassed the opinion of leading ESG experts and here are what they regard as the top seven trends in responsible investing:

1. Human rights has become an important consideration

Human rights have risen up the agenda for responsible investment professionals, says Actis’s Head of Responsible Investment, Shami Nissan. “The PRI has done a lot of work on this over recent times, partly as a result of the UK’s Modern Slavery Act, but also similar initiatives in countries such as Australia,” she says. The main area of focus is on risk in the supply chain, where firms and their portfolio companies have a legal responsibility to monitor the risk and remedy any issues that crop up. “This risk is particularly acute in emerging markets, where many supply chains end up,” adds Nissan.

2. Climate risk is paramount

New guidelines from the Financial Stability Board calling for private equity firms to disclose the risks portfolio companies face from climate change are a potential game-changer. “For the first time we are being asked to consider the impact on the company not the impact of the company,” says James Stacey, partner at environmental consultancy ERM, which carries out climate risk assessments for general partners. The FSB’s Task Force on Climate-related Financial Disclosures has said the financial risk that climate change poses to companies should be disclosed as part of annual financial filings.

3. RI has become a core part of the value creation process

There are, says PRI’s Fiona Reynolds, “a growing number of GPs” that are vocal about the value-add that ESG can bring to their investments. That’s reflected in the Capital Dynamics poll where 79 percent of GPs said they believe that the implementation of responsible investment or ESG can increase returns to investors.

Adam Blumenthal, founder and managing partner of Blue Wolf Capital, feels strongly that ESG principles have reached the point where they are seen as a fundamental part of the value creation process, rather than a mere box-ticking exercise.

“A key trend is the recognition that ESG should represent a strategic initiative rather than a reporting requirement, and that ESG principles should be aligned with value creation rather than a tax on value creation,” he says.

4. SDGs are being embraced by investors and corporations

The UN Sustainable Development Goals, adopted by all UN member states in 2015, have been embraced enthusiastically by the responsible investment community, says Fiona Reynolds of PRI. “They present a sustainability framework that finally has investors and corporates speaking the same language with clearly defined objectives.”

The 17 goals include zero hunger, affordable and clean energy, gender equality and quality education. Individual investments can be screened against individual goals, said Silva Deželan, Director of Sustainability at Robeco Private Equity, a Dutch asset manager. For example, adopting the economic growth goal could be used to track jobs created, or the gender diversity goal could be used to encourage greater female participation in the workplace. “SDGs are a paradigm shift for responsible investing,” said Mikkel Kallesoe, senior sustainability advisor at Dutch development bank FMO.

5. Cybersecurity is being regarded as an ESG issue

This may not sound much like a responsible investment item, says Actis’s Shami Nissan, but it touches on the ESG issues of data privacy. Financial services and healthcare are particularly at risk from breach of confidential information, together with fraud, corruption and the misuse of personal information, which are clearly linked to the G of ESG.

This has come into particular focus as the European directive on data protection, the GDPR, is due to come into effect in May 2018. “Many firms are not yet well equipped to tackle this issue,” says Nissan, who has been working to develop a set of top 10 questions for boards to ask at their next board meeting to gauge how effective their cybersecurity measures are.

6. Impact investment is at record levels

Long considered as operating on the margins, there’s growing evidence that the idea you can have a positive social and environmental impact alongside a financial return is entering the mainstream of responsible investing. TPG’s debut impact investment fund hit its $2 billion hard-cap at the beginning of October. “We have representation from some of the TPG core institutional investors, but we also brought in some new ones,” Maya Chorengel, Rise Fund senior partner and sector lead for financial services, told PEI. “The super majority of these institutional investors never invested in an impact fund.” Over $144 billion has been placed in impact strategies, according to the Global Impact Investing Network.

7. Diversity is emerging as a key concern

Gender diversity and anti-harassment has emerged as a key area of focus in responsible investing, says the PRI’s Fiona Reynolds. “New ESG issues continue to emerge all the time and other issues such as diversity are gaining in importance,” she says. “The push for greater diversity within private equity firms, and the investment case for supporting better diversity on portfolio company boards, continues to grow. We understand that the ILPA Principles 3.0 version, expected in 2018, will expressly tackle issues of diversity and anti-harassment, giving LPs a better understanding of what commitments they might expect from GPs on these issues.”


Meet with the fund managers, investors and associations driving these trends in ESG on March 20-21 at the second annual Responsible Investment Forum New York, co-hosted by Private Equity International and PRI. CVCA members are eligible for a 15% discount with code RIF18_CVCA. Learn more about the Forum here.


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