Private Equity International – The Responsible Investment Special 2016

From ‘Why?’ to ‘How?’

It’s easy, when immersed in the industry, to start thinking that responsible investment and ESG (environmental, social and governance) issues are a distinctly ‘private equity’ concept.

One mustn’t forget, however, that of the
958 asset manager signatories of the Principles for Responsible Investment (PRI), most are primarily concerned with publicly traded securities. And yet it’s hard to see how any other manager of assets is as well positioned as a private equity fund to influence the behaviour – responsible or otherwise – of its portfolio companies. A private equity firm with a control position can study as much KPI data as they care to gather and exert ultimate influence over the direction of the company; a minority shareholder has a trading update and vote.

With this in mind, it is interesting to see how ‘responsible investment’, which in the last decade has morphed from an abstract concept into a phenomenon that can (and indeed must) be measured and reported, has been adopted by private equity.

When ESG first became an industry talking point, much of the discussion started with ‘Why?’ Specifically: ‘Why should we introduce a policy or framework for something that we do intrinsically as part of our process of building better businesses?’

Another, perhaps more candid question went like this: ‘Why should we worry about non-financial matters, when our LPs are interested first and foremost in returns?’

Perusing the pages of this, our sixth Responsible Investment Special, it seems clear to me that the industry has well and truly moved on from ‘Why?’ and is now deeply entrenched in the question of ‘How?’

We explore how, for example, certain GPs are building their own frameworks and metrics to meet the new challenges of applying consistent ESG principles across their portfolios, measuring these through KPIs and reporting back to LPs. Read about this on p. 11.

As limited partners ramp up their demands on managers for ESG-related information, many smaller shops with limited back offices have started to ask themselves how they can possibly keep up. With different LPs wanting different data sets, the task becomes even more burdensome. On p. 22 we examine the PRI’s efforts to produce a standardised due diligence questionnaire to ensure that LPs are not forcing GPs to duplicate their efforts.

Meanwhile, on p. 33, David Russell, co-head of the responsible investment team at USS Investment Management, explains how the
£48 billion pension scheme assesses prospective GPs on non-financial matters before it writes any cheques: a useful ‘how-to’ for any LPs wondering how to integrate ESG into their due diligence process. We also hear from Ontario Teachers’ Pension Plan’s chief investment risk officer on how it applies its five responsible investing principles across both its fund commitment programme and its extensive direct investment programme (p. 16).

Private equity is getting to grips with responsible investment at an institutional level. Please read on to find out how.

Enjoy the supplement,

Toby Mitchenall

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