Private equity firms are responding to LP demands that environmental, social and governance (ESG) factors become more embedded in the investment process in a wide range of ways, leading to inconsistencies in responsible investment best practices across the industry.
London Business School's Coller Institute of Private Equity, in partnership with private equity firm Adveq, surveyed 42 private equity firms globally and found that investors are driving increased adoption of ESG policies at private equity houses, but that policies are being implemented and executed in different ways based on geography.
The report found European managers tend to apply ESG policies by industry, suggesting a sector-based adoption of ESG policies. In contrast, Asia-Pacific and MENA managers have almost no uniformity in their ESG policies and procedures, with most firms considering ESG policies more as guidelines than as hard and fast rules.
North American managers are sandwiched in the middle between the two extremes, with some firms taking an industry-specific approach and others treating ESG policies as guidelines reserved for select investments.
The report pins some of the variance down to ESG data collection, which can be idiosyncratic on a deal by deal basis and difficult to integrate into the decision-making process. ESG is also a bigger demand for European institutional investors, some of whom refuse to commit to managers without enough dedication to responsible investment.
“It may also reflect the current lack of standards across ESG metrics, underlining the additional challenges associated with understanding the materiality of ESG issues across a diverse set of industries and geographies,” the report said.
Unaffected by geography, however, was the absence of explicit ESG agreements signed by fund managers with outside parties like LPs and portfolio companies.
The study called this surprising, “given that some would argue that ESG integration may compromise investor returns and, as such, it could even be legally contested.”
The data also showed little mix in what types of ESG categories fund managers target, meaning no one issue (environmental, social or governance) was favored over another if an ESG program had been adopted.