If I don’t see an ESG policy in a private placement memorandum, I’ll ask the [GP] about it.”
These words, from an investment officer working at a US pension plan with no specific environmental, social and governance mandate, sum up the state of ESG standards in infrastructure investing in the US.
Investors in the asset class are starting to pay close attention to these standards and are incorporating them into decision-making processes, according to delegates at sister publication Infrastructure Investor’s LP Summit in New York.
US infrastructure investors have embraced ESG more than their private equity counterparts, delegates said. One reason is the nature of the assets; it is easier to establish and measure these policies when the assets are real and their impact on their environment is – sometimes literally – concrete.
Among US limited partners investing in infrastructure, endowments are taking a leading role in implementing ESG, said one investment consultant. But in general, he added, US LPs’ involvement in ESG pales in comparison with that of European investors.
Four key points emerged from the summit – relevant to all asset classes, not just infrastructure.
Going beyond principles
The United Nations Principles for Responsible Investment set out a framework for LPs and general partners, but they need to translate into actual programs that can be implemented and drive decision-making.
“They’re good in the sense that they’re out there and they get people thinking about it,” said one delegate. “I think it’s helpful, but how you take it to that next level and make it part of your DNA is another question.”
Reporting benefits
The program should report effectively to investors and the stakeholders who are responsible for approving the project.
“We wanted to show each member of the city commission how many of their constituents were working on the project and receiving a paycheck,” said another delegate. “They loved it. We reported on an infrastructure project’s impact on jobs in a way we hadn’t done before.”
When policies don’t work
Just having a policy is not enough. One LP – an investor in energy-focused funds for around five years – referred to several companies which had been responsible for oil spills.
“The fund managers actually had a responsible investment policy in place, but it still occurred,” the LP said. “We had to go back and ask where the breakdown was, why was this policy that you had crafted and marketed to our funds not followed, where are the holes and how do we fix them?”
Strength in numbers
If you are an LP wanting to bring ESG issues to the attention of a GP, it’s wise to team up with more influential LPs.
“We needed a coalition partner,” continued the same LP. “We had to go find other LPs and find common cause, where we were all being hurt by this issue going on in the portfolio company, and ask them to join us to push a new set of standards.”
That LP has now strengthened her organization’s due diligence process, and has built “enforcement tools” into limited partnership agreements, where failure to adhere to standards has an impact on the fund economics. “At some point their management fees have to be affected, so people start paying attention,” she said.
If you do not receive this within five minutes, please try to sign in again. If the problem persists, please email: