Aligning the responsible investment interests of limited partners and general partners
PwC's analysis of investor attitudes to responsible investment in the private equity industry - explores Limited Partners (LPs) and their attitudes to Environmental, Social and Governance (ESG) investment issues. Respondents included major asset management investment companies and pension investors including the California State Teachers Retirement System, UK Universities Superannuation Scheme and Swedish Pension Funds.
97% expect responsible investment to increase in importance over the next two years, with fiduciary duty, reputational risk and corporate values ranked as the top three reasons for responsible investment.
While there was broad agreement from investors that ESG creates value, both for society and shareholders, respondents say it is difficult to quantifying reputational value or risk reduction and to incorporate it into investment criteria.
Key findings include:
- 88% believe responsible investment adds financial value in private equity
- 83% of LP respondents believe that better management of ESG factors is their fiduciary duty
- 97% of LPs carry out an ESG assessment of a General Partner’s (GP, or private equity house) approach to RI before allocating funds
- 71% said their fund allocation was now linked to achieving ESG conditions
- 83% have responsible investment policies in place applying to their private equity investments
- Adoption of the ESG Disclosure Framework – the international standard for the industry - is mixed. 31% said they use it regularly, 14% occasionally, 47% never. LPs don’t know what information to ask for, and are concerned at the cost implications for “onerous” reporting – with some confessing they would struggle to analyse large volumes of ESG information even if they knew what to ask for and got it
- Despite the profile of the investment concerns over the past year, LPs revealed limited formal ESG reporting, with a focus on qualitative rather than quantitative data
- Respondents reported concern about their capacity to identify, examine and respond to ESG reporting
- The difficulties and high costs of exiting a fund once capital is committed means withdrawing or withholding capital is rare (18%) if adverse ESG info comes to light
The survey reflects the recent turbulent debates and action targeting institutional investors, particularly the pension funds of large public sector, education and religious organisations. Campaigners have called for the withdrawal or scaling back of investments from fossil fuel related activities and other sector-based investments with potentially negative environmental impacts.