Investors in private equity have insufficient, patchy detail on how managers are considering environment, social and governance issues in their investment processes, according to a group of European LPs.
“The quantitative side of this is very thin,” said Maria Sanz Garcia, managing partner of Munich, Germany-based fund investor Yielco Investments.
Speaking on a panel at an event organized by the Spanish private equity and venture capital association ASCRI in London, Sanz Garcia said that the application of ESG principles had become “a tick the box exercise”.
For example, most GPs that Sanz Garcia deals with are now signatories of the UN Principles for Responsible Investment: “Everyone does that in Europe. What we try to do is get more information on how ESG is lived in the GP. We always ask: have you declined any investments because of ESG matters?’
“Everyone has an ESG policy and is a signatory,” she added, “but when you start asking these questions, there are not many answers.”
Sanz Garcia also cautioned against relying too much on outside consultants to create ESG policies. “Firms will get an outside consultant like EY or Deloitte, which for me is already a sign of concern.” This is because, said Sanz Garcia, it shows the GP itself has not necessarily taken time to think about applying it to their companies. “They have outsourced this function.”
Sanz Garcia compared her dealings with European and US GPs: “We invest a lot in the US in smaller managers, and when you ask them about ESG, they often ask ‘what does ESG mean?’ If you go to the southern part of the States it is worse.”
Maite Lacasa, managing partner of Spanish family office MdF Family Partners, noted that for smaller firms – emerging managers and venture capital firms – ESG “is not a priority for them”.
“They are not doing anything wrong,” Lacasa said, “but they may not have a written policy.”
When asked what the most significant challenge was for LPs was in the area of ESG, Keimpe Keuning, executive director at Swiss firm LGT Capital Partners, said it was the need for data.
“There is always this back and forth on how many questionnaires you can deal with, but there is a need for transparency at the institutional level,” said Keuning. He noted the example of the Task Force on Climate-related Financial Disclosures and its push for more reporting around climate-related risks. “You see this trickling down, which means we all need to be better at knowing what our carbon footprint is.”
The future of private equity investing could include a direct link between the attainment of sustainability goals and the amount of carried interest a GP is entitled to. This is already the case with some impact funds, said Yielco’s Sanz Garcia. “We would like to see funds having measurable goals in the way that impact funds do. They have impact goals that are measured, and they are linked to their compensation,” she said, adding goals could relate to any ESG measure, such as energy usage or diversity. “As we move forward, this could be the next step of ESG.”
“It is critical to have performance linked to impact,” echoed MdF Family Partners’ Lacasa.
There is a long way to go before that reality, however. “The challenge is that [ESG data] is qualitative and not quantitative,” said Sanz, “but so long as we keep asking [for it from GPs] and saying it is important, and the regulator keeps saying that it is important, we will keep the ball rolling.”
ASCRI’s LPs & GPS Conference took place at EY’s offices in London on October 22.