BY Fraser Tennant
Almost two thirds of UK private equity (PE) firms now embrace environmental, social and governance (ESG) principles as part of their investments, according to research published this week by BDO LLP.
Increasingly, says BDO, PE firms have to prove that their policies at least match what can be demanding ESG criteria set out by limited partners (LPs), some of whom have been at the forefront of ESG investment for several years.
However, with many PE firms failing to make their full ESG policy publicly available, some risk falling behind, and more work is needed to bring those firms into line with expectations of a broader group of stakeholders.
According to the BDO research: (i) 57 percent of PE firms clearly set out the changes they have implemented to make their investments more ESG-focused; (ii) 49 percent of PE firms are signatories of the United Nations Principles for Responsible Investment (UNPRI), the world’s most-recognised set of ESG principles; (iii) 48 percent of PE firms report in detail on the ESG impact of their investments; and (iv) 25 percent of PE firms have a dedicated individual or team responsible for embedding ESG into the investment process.
“A manager’s ESG approach is becoming an important consideration for LPs looking to deploy capital into PE,” said Jamie Austin, a partner at BDO. “PE firms have made a lot of progress in a short space of time in developing ESG principles and using them to guide their investments. But there is still a way to go and some firms may look increasingly isolated by making no reference whatsoever to ESG.”
Furthermore, the BDO research reveals that investors are looking for PE firms to strengthen the presence of ESG criteria in due diligence processes, with ESG credentials needing to be a fundamental focus of these risk assessments, if firms are to gain the support of investors.
Mr Austin concluded: “We suspect the next stage is that investors will not just want a commitment to ESG – they will also want tangible proof of how the PE fund has actually delivered on that commitment. The idea that private assets mean little or no public disclosure on important issues like ESG is increasingly being challenged.”
News: Two thirds of private equity houses now take ESG into account, but more progress remains to be made