Embracing ESG in Private Equity


Clients were driving demand for ESG investing long before EU regulators took up this challenge and formalised processes around this trend. According to Bryan Fage Head of Sales and Relationship Management at Societe Generale Securities Services (SGSS) Luxembourg, this is why asset managers and businesses must build their strategies around sustainability. But how to achieve this alignment?

ESG is commanding ever greater attention from investors, both in the retail and institutional sectors, and Private Equity is no exception. Little wonder.

“The effects of global warming are becoming harder to ignore around the world, to which has been added the stresses of the pandemic,” said Mr Fage.

“More people than ever are now aware of the necessity for a more durable and sustainable approach to our ways of life and how we invest.”

To better understand where ESG is strategically positioned and prioritised by their clients, Societe Generale Securities Services carried out a series of interviews with some thirty clients and partners across Europe between February and May 2021. The goal was also to gain a clearer view of the opportunities and challenges they face. Results were published in a report entitled sustainable investing: History in the making.

The survey covered institutions in the main European financial centres, and included managers of both UCITS and Private Asset funds as well as institutional investors. Three trends emerged from this survey: all players had implemented or were working on integrating investment sustainability into their strategies; ESG data sourcing and its use is a key concern; and Private Markets players face particular challenges when implementing their strategies.

Private Markets have taken the world by storm in recent years, with Private Equity being one of the blossoming asset classes. In transforming from a niche sector to mainstream, Private Equity has of course attracted more and more Institutional money and following the implementation of AIFM directives and regulations. Private Equity investment companies now faces the responsibility of continuing to generate stark returns in a transparent and ESG driven environment.

 “It came as no surprise that all those we surveyed have either implemented ESG-focused investment strategies, or are in the process of integrating these into their development roadmap,” said Mr Fage.

Yet for some, there were still questions about the “durability of ESG measurement criteria as regards to their ESG impact, and they want to see these pass the test of time before moving them to the heart of their investment strategies.”

Recent and upcoming EU regulations are obliging fund managers to alter their approaches, “but many have long considered ESG as an opportunity and a driver of value creation, and the new maturity around sustainable finance is down to a variety of different factors,” Mr Fage noted. These include how “ESG-focused funds have benefitted from improved performance, but also we are seeing a shift in limited partners’ ethical standards,” he added. Then there is the impact of millennials and post-millennials who are making judgement about responsible behaviour when developing their loyalties to brands.

Although Private Equity is obviously an asset class with unique characteristics, all businesses are facing similar challenges, not just financial services. Mr Fage sees four common themes that need to be addressed by all:

  • Central to successful implementation of ESG policy is defining clear ambitions and building entire strategies around these principles.

  • There needs to be recognition that applying every ESG criterion is a tough challenge. Firms have to select which are most relevant and applicable for them, then set priorities and move towards these goals carefully.

  • Efforts will be required across the entire value-chain to ensure the effective implementation of meaningful ESG, so often these moves will become mandatory if ambitions are to be met.

  • Understanding how to identify and manage ESG risk and opportunities has become central to the implementation of ESG strategies. This involves establishing ways to measure and monitor dynamic environments as paths are chosen and navigated.

“Societe Generale has a long track record of strong commitments and mobilising efforts,” said Mr Fage.

He pointed out how 20 years ago they became the first French bank to affirm its commitment to sustainable development by signing the UN Environment Programme statement by Financial Institutions on the Environment and Sustainable Development.

Alongside this, he noted that SGSS has long standing experience servicing investment funds and data management reporting, knowhow that applies to the servicing of sustainable funds.

Societe Generale Securities Services of course seeks to not just service its clients, but partner with them to the greatest extent possible to enable continued and collective growth.

A 2005 United Nations Global Compact report outlined recommendations to integrate ESG measures into capital markets, entitled “Who Cares Wins”.

SRI and ESG considerations have vastly evolved and improved over the years, nevertheless the title is as true now as it was back then and when associated with Private Equity it applies perfectly to Managers, Investors and Service Providers, says Mr Fage.

Article published in Paperjam on September 21, 2021.