LPs’ ESG checklists get ever more intricate – AVCJ Forum

This was one of the numerous priorities for investors in emerging markets when assessing GPs and co-investment opportunities with an environmental, social, and governance (ESG) lens.

They also flagged nature-based carbon sinks, biodiversity, human rights, diversity, non-financial incidents reporting, the use of inclusive terminology to ensure ESG is a whole-team effort, and geography-related climate risks such as water stress and excessive heat.

Moreover, LPs indicated industry networking groups would play an expanded role in mainstreaming best practices in these areas. Initiative Climat International (ICI), a global environmental private equity community that recently launched an Asia chapter, was singled out.

However, the consensus view is that due to the developing nature of many ESG issues and team bandwidth limitations, it isn't necessary for fund managers to have existing formal policies in place to be considered for investment – as long as there was a philosophical commitment. “Intentionality” was a recurring theme.

“We’re looking for a long-term vision. We’re looking for a commitment to do the right thing rather than just a very near-term view on what is the quickest way to make money on this,” said Jie Gong, a partner at Pantheon and chair of ICI’s Asia chapter.

“We tend not to like investors that are more levered hedge fund types that invest in companies and flip them around. That’s a very cyclical kind of approach, not exactly the hands-on ownership model that we endorse.”

Cybersecurity as an ESG-specific risk was highlighted as a growing concern given the greater data disclosure, automation, and transparency that comes with stricter compliance standards. This encompasses data security, data privacy, and related requirements around insurance, auditing, and training.

“I think people look at governance as having a board seat, and that’s pretty much it,” said Saima Rehman, private equity funds investment officer for East Asia Pacific at IFC. “There’s a whole area of governance related to cybersecurity and data governance that is increasingly more important which we in emerging markets have ignored and can no longer afford to do so.”

Meanwhile, increasing recognition of the interconnectivity of ESG issues is seen as influencing LP views on potential investees. The notion that environmental benefits have social costs and vice versa must be factored into deal-level due diligence in order for material risks to be comprehensively mitigated.

“A lot of funds have a very myopic view of ESG. They pride themselves in focusing on ESG, but literally, they are focusing on one part of ESG, either E, S, or G, and they are ignoring the other two,” said Navjeewan Khosla, a principal at Novo Holdings.

“What we look for is funds that take a balanced approach, which do not take an extreme approach of E at the cost of S. That is very important. Funds that have a holistic positive effect on society as well as the environment is something we look for.”

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• Topics
• LPs
• Advisory
• Asia
• Pantheon
• IFC
• Novo Holdings
• ESG
• Cybersecurity
• diversity & inclusion (D&I)
• Due diligence
• AVCJ Events