Private Equity International (PEI) held its seventh annual Responsible Investment Forum (RIF) in London on 25-26 May 2016. Over 200 experts and stakeholders attended the forum to discuss emerging ESG trends in the private equity industry.
Adam Frost, the RIF’s chairman, opened the conference by highlighting how the narrative around environment, social and governance (ESG) considerations had moved from ‘why ESG was needed’ in 2010 to ‘how ESG is integrated’ in 2016. Indeed, numerous limited partners (LPs) and general partners (GPs) stated that ESG integration was no longer negotiable. For example, Mirja Lehmler-Brown (senior investment manager at Aberdeen Asset Management) said that she had turned down two funds in 2016 – that it was “crazy” to reject from a financial perspective – because “how they were dealing with ESG was not at the standard that you would expect”. PEI later warned that ESG-complacent GPs had “been warned”.
Effective engagement between LPs and GPs, and GPs and portfolio companies was a common theme identified for ensuring alignment on ESG. In particular, it was seen as vital to engage with investees as early as possible in the investment cycle to assess their commitment, capacity and track record (at the fund and portfolio level). Having aligned requirements and expectations during the investment / commitment phase, regular engagement during the holding period is then essential to provide support.
The jargon sometimes associated with ESG was highlighted as a barrier to effective integration. In markets where ESG is less embedded, the sometimes confusing and overlapping language associated with ESG can be counter-productive. Esoteric language can lead GPs and portfolio companies to believe that ESG implementation will be onerous, when they may already be covering many requirements in day-to-day operations.For instance, a deal team might closely consider the drought risk associated with a company, without specific reference to a wider climate change policy.
While the RIF noted the significant progress which had been made since 2010, the case for deeper integration was clear. Fiona Reynolds (the managing director of the Principles for Responsible Investment) concluded that “we’re all really here to create impact in investments, not just have processes in place”.