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E S G
I N V E S T I N G ]
“ESG
(environmen-
tal, social,
governance)
investing is nothing more than feel good
marketing,” fumed an attendee at Super
Return in Berlin, the colossal private
equity conference held back in February
2017. This flippant comment could not
be further from the truth as more private
equity managers start to apply ESG into
their investments.
But what exactly is ESG? Characteris-
ing ESG is not easy, mainly because it is
a very broad concept and peoples’ views
are not linear. PricewaterhouseCoopers
(PwC) identified an extensive list of
criteria which private equity should apply
when making ESG investments including
equality and diversity in the workplace,
health and safety, carbon footprint, water
usage, responsible marketing, sustainabil-
ity in the supply chain, respect for human
rights and community investment.
A study by BNP Paribas Securities
Services found 79% of asset managers and
owners factored ESG into their invest-
ment strategies. Other reports concurred.
Analysis by PwC back in 2015 found 71%
of limited partners (LPs) would refuse to
participate in a General Partners (GPs)
“Reporting on ESG is very difficult and time intensive,
certainly for private debt and equity as it is hard to
standardise across the industry.”
MARC DE KLOE, MANAGING DIRECTOR, ADAMAS ASSET MANAGEMENT
fundraising or co-investment on ESG
grounds.
“LPs, particularly pension funds, are
coming under pressure from their ben-
eficiaries on ESG investing and in turn
they are applying pressure themselves on
private equity managers,” said Michael
Collins, chief executive at Invest Europe,
an industry group representing the inter-
ests of private equity.
The institutionalisation of ESG invest-
ing has been happening for several years
now. Many experts acknowledge that the
breakdown of ESG investors by type has
changed from being concentrated in the
HNWI (high net worth investor), founda-
24
Global Custodian
The Private Equity Issue 2017
tion, family office and charity segments,
to becoming a pivotal criterion for large
institutions including pension funds,
sovereign wealth funds and insurance
companies.
A performance enabler
In terms of geographical location, Marc
de Kloe, managing director at Adamas
Asset Management, said Nordic and
Northern European investors in particu-
lar took ESG very seriously. Tanja Ferri,
managing director at consultancy Laven
Partners, agreed that ESG was something
which Europeans – especially Nether-
lands-based investors – were enthusiastic
about.
ESG’s growth in private equity should
not be seen through a moralising lens
but as a practical and sensible business
decision. Empirical studies suggest ESG
is a performance enabler with 83% of
respondents to the PwC study stating its
incorporation could reduce risk and drive
up returns.
A more recent report by State Street
Global Advisors (SSGA) found 84% of
investors were “satisfied” or “very sat-
isfied” with ESG performance. It added
satisfaction levels were the highest among
those asset owners who had the longest
experience of ESG investing.
“Private equity is adopting ESG, mainly
because it helps them look at their invest-
ments from a different angle. Take a pri-
vate debt owner of a factory. They might
ask the management to recycle more
water rather than pump it back out into
the ecosystem, because recycling costs
– unlike water bills – are fixed. Equally,
they may impose tough guidelines in-
structing companies to treat staff well to
minimise the risk of strike action, which
would obviously damage cash flows,” said
De Kloe.
Private equity is particularly well-suited
to implement ESG agendas as managers
hold meaningful stakes in companies for
the long-term. “ESG is a long-term in-
vestment play which suits private equity.
Furthermore, private equity managers
have controlling stakes in their portfolio
companies as well as board seats, and
this makes it easier for them to drive
and deliver change, at least more so than
an asset manager who is simply buying