Investors want to see detailed information on environmental, social and corporate governance issues from their fund managers – including industry standard KPI data, value creation plans and direct involvement with portfolio companies.
Investors present at PEI Group’s Responsible Investment Forum in San Francisco, held in September, shared the sustainability qualities they find most attractive in fund managers. The conference was held under the Chatham House Rule, meaning that comments could not be attributed to speakers.
“We are increasingly seeing our LPs wanting more transparency and insight into what’s going on in the portfolio in terms of ESG,” said one investment consultant.
“I get calls all the time [from LP clients] asking, ‘Can I have a comprehensive ESG report on my mature private equity portfolio?’” said another consultant. “That’s about 80 funds, a few thousand portfolio companies.”
“One of the real value-adds is when you have a dedicated function that can go in and be an operating tool for a portfolio company,” said another LP.
They added that a GP’s ESG professional should be “working with the CEO or CFO to make sure the messaging is coming down from the top that these ESG KPIs are important for our company… [and] doing the day-by-day work of working with the operations, HR [and] the portco’s sustainability team.”
Another LP, investing from a dedicated climate investment bucket, said: “Every investment has a hundred-day plan rolling out financially material sustainability factors.
“It’s several points in the deck. It’s something that we hold [our GPs] accountable to; it’s something that they hold their [portfolio company] management teams accountable to.”
Firm commitment to ESG
Dedicated ESG professionals are a positive sign for LPs.
“It’s really exciting and really encouraging to see that [firms] are starting to take action and put real dollars to work to build a bench of [ESG] talent,” said one LP. “There are a lot of [investment professionals] that are getting retooled and reskilled today to have that skill set, and there’s a lot of outsourced talent.”
There should also be buy-in across the firm – beyond the ESG department – on sustainability issues, several LPs noted. One investment consultant said it asks GPs “how [their] investment teams, board members [and] operating partners are starting to think about sustainability considerations as a driver of value.”
Many asset owners and investment consultants expressed support for the ESG Data Convergence Initiative.
“It resolves some of the complexities” of different ESG data requests from investors and comparing ESG data across portfolios, said one consultant.
“One of the ways we’re looking at using the ESG data is to supplement our estimated greenhouse gas emissions data for our LPs with the information that we’ll have access to through our GPs that are signed up to EDCI… that’s really important to some of our LPs,” said the consultant.
Standardization initiatives such as the EDCI have been criticized for neglecting materiality – the ESG factors uniquely relevant to different assets.
As well as providing data for the EDCI’s six focus areas, “GPs need to continue to understand and look at their portfolio companies to think about which ESG factors are financially material to their portfolio companies, and not just what the industry standards have become,” said another consultant.