[ A N A LY S I S
public equities and taking small, minority
stakes that are only held for the short
term,” said Collins.
Formalising the process
Incorporation of ESG also allows asset
owners to reduce their long-term invest-
ment risks. France currently is widely
considered to be one of the most for-
ward-looking countries in the world in
terms of environmental legislation, having
proposed a ban on the sale of petrol and
diesel vehicles by 2040, as well as outlaw-
ing any new project which uses petrol,
gas, coal or shale products. This is all part
of France’s efforts to turn itself into a
carbon neutral country by 2050.
Assuming France is not the only country
which pursues this agenda, it is very
possible that energy companies which fail
to reform their models or do not embrace
renewables, will be out of favour at in-
vestors, mainly because their share value
could be adversely affected by this legisla-
tion in the long-term. Any private equity
manager with exposures to such assets
could find fundraising very difficult, as it
is a long-term investment risk.
Other initiatives and rule changes have
helped ESG investing mature. The UN
Principles for Responsible Investing (UN
PRI) and clarifications on ESG guidelines
for ERISA pension plans from the Depart-
ment of Labor (DOL) have helped forge
greater interest and awareness. “Public
sector pension funds aligned to countries
which back a particular policy – such as
being a signatory to COP 21 or UN SDG
- may pursue investments that support
those causes,” said Ferri.
Efforts by bodies such as the UNPRI
have been made to formalise the ESG
investment process. The UNPRI engaged
with a number of industry bodies includ-
ing AFIC, AVCAL, BVCA, EMPEA, ILPA
and Invest Europe to draft its LP Respon-
sible Investment Due Diligence Question-
naire. Again, this will help investors in the
manager selection process, but more work
needs to be done to ensure that reporting
is accurate and measurable.
Reporting concerns
The SSGA report said around half of
investors struggled to benchmark the per-
formance of ESG strategies against those
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of their peers, mainly because of a lack
of available data and tools. Interestingly,
the same report found that investors with
the most ESG exposures [61%] were more
likely to struggle with benchmarking
performance versus those with the least
exposure [52%].
“It may be that this more experienced
group has a greater appreciation of the
challenges associated with benchmarking
than those with lower exposure or more
recently established programs,” read the
SSGA study. Again, the issue for investors
“ESG is a long-term investment play which suits private
equity.”
MICHAEL COLLINS, CHIEF EXECUTIVE, INVEST EUROPE.
remains that ESG is still a young phenom-
enon and it may take some time before
reporting is better organised.
“Reporting on ESG is very difficult and
time intensive, certainly for private debt
and equity as it is hard to standardise
across the industry. Our approach is to
instruct project or portfolio managers
to include it in their investor reporting,
rather than take a commoditised ap-
proach. However, you do need to adopt
internal standards and develop your own
framework,” commented de Kloe.
Collins said ESG reporting methodol-
ogies varied depending on the manager.
“There are two schools of thought in
ESG reporting at private equity. There
are those who want a fixed, standardised
template containing detailed ESG criteria
while others want greater flexibility and
ESG information that is specific to their
underlying needs. It is a discussion that
will probably never be resolved as the
industry is diverse. A mega buy-out fund
will inevitably have a different stance and
approach to ESG in comparison to a man-
ager running $60 million or $70
million, and the same
goes for large
and small
LPs,” he
said.
The Private Equity Issue 2017
globalcustodian.com
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