LPs want GPs to show comprehensive approach to ESG - AVCJ Forum

"PE guys get ESG in that they care about waste and they care about labor strife, but they don't pay enough attention to governance," said Christopher J. Ailman, CIO at the California State Teachers' Retirement System (CalSTRS). "The real challenge is doing a better job setting up governance when they take the company public or sell to another GP. They hand it over with an all male board... but you need diversity as a risk mitigation tool."

He stressed that GPs should bear in mind that institutional investors in a private equity fund may remain invested in a company once it goes public, so there is a need to consider issues like governance from a longer horizon perspective. These sentiments were echoed by Priya Mathur, a board member at the California Public Employees' Retirement System (CalPERS) in the context of why GPs and LPs are slow to consider ESG issues.

"There is an old-fashioned way of looking at investment which is very short term-focused," she said. "Shifting focus to a long-term universal owner way of looking at investment returns is going to be the way forward."

The more progressive LPs, CalSTRS and CalPERS among them, already incorporate ESG considerations into their investment approaches, and they expect portfolio GPs to do the same. It amounts to more than just having a responsible investment officer who participates in the investment decision-making process; they want to see evidence of ESG being factored into deal sourcing, through the holding period and then into exit planning.

"Don't just give me a brochure or say that person is our responsible investment officer and the rest of the shop is 100 people on another site in the city," Ailman said. "Show us how ESG is written into your bylaws; show us a due diligence memo from an investor meeting; and show us not just the ESG section but multiple sections where E, S and G are covered in detail and individually."

While oversight generally involves having GPs complete documentation that is to a certain extent standardized for each institution, individual follow-ups are intended to understand the nuances present in a manager's ESG strategy. There is an expectation of a fully embedded process, but not a one-size-fits-all approach.

"What is most important is trying to find out if ESG is in the GP's investment beliefs; there is still a lot of lip service out there," said Anders Strömblad, head of alternative investments, Second Swedish National Pension Fund. "If GPs don't think it is important, that's fine, but they won't get our money."

Asked to identify where Asia falls short on ESG compared to Europe and North America, Xander den Uyl, a member of the board of trustees at Netherlands-based ABP, cited transparency. "In the past there has been a lack of transparency, which has not helped the process of investing in private equity in Asia," he said.

Implementation of ESG policies has been challenging for GPs in the region, particularly those making minority investments - where they rely on influencing strategy rather than leading it - and those operating in less developed markets. However, getting LPs to engage properly on the issue can also be problematic.

"When working with GPs to get them ready for fundraising, there is a need to focus on ESG, and those in the LP community that really embrace it want to talk about it; but you also risk of scaring away some LPs," said Veronica John, senior managing director at Diamond Dragon Advisors. "A lot of LPs don't want to talk about that because they think it has a negative impact on returns, whereas really it improves returns."

The AVCJ ESG Forum, co-hosted by Principles for Responsible Investment, is taking place today in Singapore. For more information, go to www.avcjesg.com.

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• Topics
• GPs
• LPs
• Advisory
• Regulation
• ESG
• AVCJ Events
• California State Teachers’ Retirement System (CalSTRS)
• California Public Employees' Retirement System (CalPERS)
• APG