Private equity firms are showing progress in engaging ESG actions, but there is still room for significant improvement with less than a third being formal signatories of UN initiatives to promote sustainable activities
A survey carried out by Aberdeen Standard Investments (ASI) found that private equity firms around the world are taking action in relation to ESG, such as carbon offsetting, reduced air travel and reducing reliance on single-use plastics.
More than half the respondents implemented at least one positive ESG change in the past year, and over 80% indicated that they promote diversity initiatives and encourage diversity at a portfolio company level.
However, less than one third of general partners (GPs) surveyed are a formal signatory of the UN’s Principles for Responsible Investments (PRI), UN Global Compact or similar, or are considering becoming a signatory. Furthermore, 39% have no plans to sign up currently.
In its fifth year, ASI surveyed 176 GPs across Europe (60), North America (82) and Asia Pacific (34) with an overall response rate of 52%.
Merrick McKay (pictured), head of European private equity at ASI, commented: “The general trend suggests that private equity firms are regarding ESG as increasingly important, with firms based in Europe leading the way. There’s still scope for improvement in terms of their ability to measure and monitor against key ESG-related metrics and this is something that we will be encouraging during our discussions with GPs.”
The survey also found that from a global perspective North America continues to lag behind Europe and Asia Pacific, with the latter seeing an improvement in quality.
“We are optimistic looking at results from firms based in Asia Pacific, with a number of respondents having implemented initiatives in the last year to improve ESG performance. ESG engagement in North America is lagging behind Europe and Asia Pacific and we will follow up with those GPs who either didn’t respond or who scored poorly relative to their peers. ESG remains a core component of our investment philosophy and is incorporated into our diligence and monitoring processes.”
The research also found there was an increase of the UN’s Sustainable Development Goals but many firms were looking for industry guidance on how to apply them.
Downing’s head of investment Kostas Manolis commented that smaller companies at the earlier stages of their businesses are more ESG conscious:
“We believe that putting ESG criteria at the core of our investment strategy will enhance, not constrain returns. Downing became a UNPRI signatory last year and we have dedicated resource integrating ESG into our investment process.
“We invest mainly in earlier stage businesses who we have found to be naturally more conscious of environmental and social factors so our focus is on working with them to build their governance processes as they grow. This approach is and has always been fundamental to our goal to be an active and responsible investor”