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Private Equity and Responsible Investment

18/07/2018

All private equity players are showing a growing interest in Environmental, Societal and corporate Governance (ESG) issues. Is it just a posture or are they really convinced ?

Reluctant or committed

 

A study recently conducted by SGSS1 highlighted a significant disparity in commitment level Private Equity management companies have on the integration of ESG issues and the measures taken to limit global warming in their investment policies.

Nevertheless, there is a fundamental trend: the "reluctant" or even "opportunistic" actors category tends to diminish, leaving room for truly "committed" actors.

As a first step, Asset management companies often start with an exclusion policy from some investment sectors (typically arms, tobacco, alcohol, gambling, pornography, GMOs, human cloning). These exclusions have already forced some companies to refrain from making acquisitions that were attractive and proved lucrative for other companies.

 

Increased commitment

 

The next step is to use extra-financial criteria in the investment management. ESG criteria are increasingly being incorporated into the investment life cycle from the pre-investment analysis phase to the selling. These criteria defined by the management companies are now often supplemented by criteria defined by the investors. Once the acquisition is completed, the objectives are carefully monitored by the board of directors of the portfolio companies, which produces annual reports. Meanwhile, the management companies will generally consolidate this information in an annual report to investors. It is important to note that,  even if investors, with large assets, have clearly integrated ESG criteria into their management companies selection process, they are still doing no more than basics reports.

Some companies also train their teams in ESG & Climate by investment sector so that they have a better understanding of the issues of the targeted companies.

 

Convinced or opportunist ?

 

Management companies "committed" to ESG topics have generally well perceived that institutional investors usually make them discriminating criteria in their Asset Management companies choice. They would therefore seem more and more convinced of the need to go into ESG management.

Moreover, beyond the pressure coming from  Asset owners, Asset managers  are also increasingly constrained by the pressure put by Regulators and the lawmakers, particularly in terms of reportings. Although France was among the pioneers with Article 173 of the Law on Energy Transition, the European Commission with the "High Level Expert Group2" is now starting to rule this topic.

So opportunism or conviction? All actors have understood their best interest was to enter into the ESG logic. Although assets under ESG monitoring show an higher increase in value, the growing pressure of public opinion and Regulators is also taken into account in the decision to switch to ESG management. It seems that, aware of their responsibility as long-term investors, Private Equity management companies are now becoming convinced players.



[1] "Taking the Long View" is a study of 100 executives of management companies and institutional investors in eight European countries published by SGSS in 2018.
[2] Group formed by the European Commission in December 2016, it is composed of 20 experts who come from the civil society, the financial sector, and university. It aims to make recommendations on the implementation of a comprehensive sustainable finance strategy in the European Union.
 

Laurent Viellard Head of Client Strategic Marketing SGSS
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