“We view environmental, social, and governance risks in a private equity general partner’s portfolio as material to our own investment decisions,” said David Russell of the UK’s Universities Superannuation Scheme (USS). “We look for evidence of management processes for these risks, as well as appropriate protocols to communicate about any issues which may arise.” USS invests with general partners which include Oak Tree Capital Management and Silver Lake Partners.
Tim van der Weide of Dutch pension administrator PGGM shared a similar outlook. “As long term investors,” he noted, “management of environmental, social, and governance issues is important to PGGM for both financial and social reasons. Our clients and their beneficiaries ask us about these issues and we want to be at the leading edge of responsible investing.”
As more LPs in the US and abroad increase their focus on responsible investing and adopt protocols such as the UN PRI, GPs will need to pay closer attention to ESG management to satisfy these evolving demands. We suggest that private equity fund managers consider the following actions toward this end:
- Engage your limited partners to discuss their interest in ESG and responsible investing. In speaking with GPs, we consistently hear that LP interest is the single biggest driver of ESG management, and that fund managers expect this interest to increase in the coming years. Rather than waiting for LPs to make requests, it is productive for your investor relations team to proactively engage your LPs on ESG issues.
- Exceed the transparency expectations of your limited partners through ESG communication. We are still in the early innings of efforts within the finance community to enhance ESG management. While they will become standard expectations in the coming years, case studies on ESG management, citizenship reports, and integration of ESG management content into private placement memorandums can be a valuable differentiator in communicating with LPs.
Beyond the expectations of limited partners, we also encourage private equity GPs to consider other stakeholders who may have an interest in ESG performance. For example, acquisition targets may look at such performance as a value-add which your fund provides – a value-add which may persuade executives to do business with your fund rather than a competitor. Similarly, regulators and the public may in some cases be stakeholders; for instance, the private equity sector may receive more attention during this year’s election cycle and GPs which can point to strong ESG and citizenship programs may benefit from a better public image.
