GPs on the fundraising trail should take note: ESG does matter. That is according to fresh research conducted by Switzerland-based alternatives firm LGT Capital Partners and consultancy firm Mercer.
Some 76 percent of the 97 institutional investors that were interviewed said they incorporate ESG when investing in alternative asset classes.
What’s more, 57 percent of respondents believe that incorporating ESG criteria has a positive impact on risk-adjusted returns, the study found.
The highest proportion of LPs that consider ESG are based in Europe, Australia and New Zealand, followed by LPs based in Asia and finally North America.
Of the institutional investors who consider ESG criteria in manager selection, 65 percent reported that most of the GPs they reviewed did not include ESG factors in their decision making process, suggesting an unmet demand for GPs embracing ESG criteria, the report said.
More than half of institutional investors who take ESG considerations into account have done so for three years or less. But while 58 percent of GPs either had an ESG policy that was either ‘fair’ (which was 29 percent) or ‘poor’ (29 percent) in 2015, 42 percent of global GPs were classified by LGT as having a ‘good’ or ‘excellent’ ESG policy, which was an increase from the 34 percent in 2014.
A GP that the report would classify as ‘excellent’ is a manager “genuinely committed to ESG, with institutional processes in place” and one who “follows through with portfolio investments and reports on ESG”. A GP rated as ‘good’ has “taken steps to integrate ESG in the firm’s approach and investment process.” While the process is institutionalized, the manager may not follow through on all levels including ownership and reporting, the report said. A GP labelled ‘fair’ on ESG criteria has minimal standards in place, but not an institutional process, while a GP rated as ‘poor’ has no minimal standards in place and “does not demonstrate a genuine desire to address ESG issues”, according to the report.
Furthermore, issues that have the potential to impact a company’s long-term risk, reputation or overall performance were viewed as significant by LPs, the study found. Topics such as carbon intensity, controversial weapons, bribery and corruption garnered strong support, while exclusion criteria such as alcohol or tobacco were rarely considered.
The results show that ESG analysis “has moved beyond ethical concerns and has firmly found its place as a risk and management topic,” Tycho Sneyers, managing partner and chairman of LGT Capital Partners ESG Committee, said in a statement. “Given the high rate of recent adoption of ESG and broad interest in the topic, we can safely assume that ESG integration will continue its rapid expansion.”
“It’s encouraging to see investors becoming increasingly aware of the potential risks and opportunities these issues can present to portfolios. Incorporating ESG considerations into investment decisions strengthens a portfolio’s defense against risk arising from governance failures, changes in policy and regulation, and environmental and social trends,” said Deb Clark, global head of investment research at Mercer.