Across all types of investment strategies private equity managers are the best at achieving high environmental, social and governance (ESG) standards, according to research from investment consultancy firm Mercer.
The research saw Mercer assign ESG ratings to thousands of investment strategies with ESG1 being the best and ESG4 the worst. To be assigned ESG1 the investment team needed to demonstrate market-leading capabilities in integrating ESG factors and active ownership of the processes.
Private equity received a top score in the study receiving 26 percent ESG1 and ESG2 ratings compared to hedge funds’ that had the worst score with 2.4 percent. Property and infrastructure also scored well overall, but there were no ESG1 infrastructure strategies.
The features the high scoring firms have in common include: ESG involvement in investment decision making, building ESG into valuation metrics and monitoring and evaluating portfolio company ESG.
There are a number of reasons for private equity firms to engage ESG matters including the industry’s high level of active ownership and engagement with company management.
There is also increased interest in this area from potential investors. Large public companies with ESG obligations are more attracted to assets that already meet their responsible investment expectations.