by Cameron Nicol, Senior Marketing Manager – eVestment Private Markets
Environmental, Social and Governance (ESG) Investing is a topic that has risen in prevalence within the asset management industry in recent years, marked by a steady increase in coverage and prominence in industry headlines, but also more tangibly by the growth of signatories to the UN-supported Principles for Responsible Investment (PRI), which has grown from an initial group of 100 at its launch in 2006, to over 2,300 as of 2019.
And while private equity has been slower to join the conversation, it seems managers are steadily taking action. Of the PRI’s total signatories, 332 reported that they invest directly in private equity assets, a membership group number which is up from 209 in 2015.
To advance adoption and focus, work has also been done by industry bodies to help the collection of data on ESG practices and compliance within firms and companies: PRI released an LP Due Diligence Questionnaire in 2015, and Invest Europe developed an ESG DDQ for portfolio companies in 2016.
But how are fund managers implementing policies? And to what extent are their investors’ commitment decisions influenced by these actions? Our 2019 eVestment Private Markets Due Diligence Survey of GPs and LPs explored these factors.
Fund Managers Place ESG Focus at the Firm Level First
For ESG, 62% of fund managers reported having a formal policy at the firm level and 40% at the portfolio deal level.
While the numbers for Diversity policies are lower, they exhibit a similar pattern: more have implemented or enforced these policies at their own firms than their portfolio companies.
Impact on Investors’ Decisions Lags
While room for improvement exists within fund managers’ adoption of ESG and Diversity policies, the results outweighed the relative importance investors reported placing on these factors during their due diligence process.
In relation to ESG policies, just 16% of investors felt a formal ESG policy at the manager level to be very important. Even fewer, 6%, felt similarly at the portfolio company level. In fact, nearly one in five investors reported they give no consideration to ESG policies during due diligence.
While investors were less vocal on the importance of ESG, Diversity did rank higher on investors’ list of priorities. Twenty-six percent of investors felt Diversity at the firm level to be very important, more so than for ESG. One respondent suggested the reason was that a fund manager should reflect society to ensure they “pursue a good cross section of potential opportunities.”