Fiduciary duty driving LP interest in ESG

Investor focus on ESG issues is all about ‘reducing risk, increasing returns,’ say speakers at the PEI Responsible Investment Forum in New York.

The top driver of responsible investment for the limited partner community is fiduciary duty, according to research published by Pricewaterhouse Coopers.

Lauren Koopman, director of the sustainable business solutions practice at PwC, cited the research during a panel discussion at the Private Equity International Responsible Investment Forum in New York on why ESG should be a fundamental part of investors’ private equity investment strategy.

Koopman said 97 percent of the 60 LPs interviewed for the research said responsible investment will increase in importance over the next two years. The research also found 71 percent of LPs would decline to participate in a GP’s fundraising on ESG grounds.

“In the conversations [with LPs, commitment to ESG] came through; it wasn’t a fad. It’s something that they are focused on, and will be focusing on more,” Koopman said.

“The main reason they said they’re focused on ESG is fiduciary duty: reducing risk, increasing returns.”

Koopman said that in a world of changing regulations or firms’ expansion into emerging markets, investors “want to be sure that the GPs they’re investing in are aware of these things and are monitoring them”.

“They want the GPs to be managing this – the GPs know the companies better than anyone – and then if there are […] issues, to report back to the LPs.”

Fellow panellist Bronwyn Bailey, vice president of research and investor relations at the American Investment Council, added that LPs are looking not only for GPs to have policies in place but to see evidence that managers are following through on these policies. “What risk factors did you identify at these specific companies during the due diligence phase and how are you mitigating these risks? What are you doing to improve them through the investment cycle of the company?” she asked.