LPs rank attitude higher than policy in ESG – AVCJ Forum

Ralph Keitel, regional lead for East Asia and PE funds at the International Finance Corporation (IFC), said that because his firm invests primarily in frontier markets and resource-poor, first-time fund managers, there is little expectation for concrete ESG policies to be in place. Instead, the development finance institution demands that a process toward a framework to be articulated and embraced. IFC can help with introductions with consultants, but there must be communication and engagement. 

“These are small teams, and their key priorities are to get their fund in place and keeping the pipeline somehow alive, while they spend 12, 18, or 24 months on average on the road. Asking those people to spend 12 hours a day writing an ESG framework would be too much to ask,” Keitel said. “Things don’t need to be in place when we first meet them, but what we absolutely expect from them is a commitment to work with us and to walk the walk."

This commitment often means incorporating ESG into the due diligence and investment processes, whether formally or not, rather than simply explaining a strategy. The idea is to avoid instances of investors reducing compliance to a box-ticking exercise, making misleading claims or “green-washing” representations of their activities or branding themselves as impact funds without fully investigating the effects of the supply chains in their investee businesses.

Deborah Ng, head of responsible investing at Ontario Teachers Pension Plan (OTPP), stressed the importance of checking key performance indicators but also noted that it is possible to make impact investments without being able to measure the impact. She added that investors must both resist complacency and recognize ESG as part of the growth of the industry and at the firm level.

“What we expect is a willingness, like us, to continually realize that we are all constantly evolving,” Ng said. “Even as we’ve been working on our process for 10-15 years, the environment is changing, expectations are changing, and our understanding of the tools we have is changing. What I want to see is a commitment to not be complacent and constantly push the envelope and continually improve.”

There was also an acknowledgment that while ESG-related themes have always been integral to the investment industry, they also represent part of a relatively new strategy in decision-making. As such, investors need to balance GP-LP alignment, thesis, intentionality, and more practical work around charting progress in target areas to avoid becoming discouraged.

“It’s very important for those of us who are doing it [impact investing] that and the end of it, the LPs can look back and say, ‘I understand the impact of that and I understand why you did it,’” Ana Lei Ortiz, a managing director at Hamilton Lane, said. “Without that, it has the potential to fizzle away. So, there’s a lot of responsibility there.”

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