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Half of PPMs silent on ESG

The recent MJ Hudson research also showed managers with less than $1bn in assets ‘seldom have an ESG policy’.

Half of private equity firms do not have environmental, social and governance investment principles or policies included in their private placement memorandums, research by law firm MJ Hudson shows.

The firm’s latest ESG guide rated managers’ and LPs’ ESG policies on a scale of zero to five. Zero indicates no ESG policy or, in the case of LPs, not requiring it. Five means ESG is fully integrated into all key decisions and influencing investment processes.

“Close to half of private equity fund managers do not include references to ESG in their PPM or [limited partnership agreement], with a similar proportion including ESG in the PPM (but not the LPA),” the report stated.

The PPMs of managers rated 0-1 on ESG did not mention these policies. Of managers rated 3 or 4 on ESG, a third of PPMs were silent on the subject.

However, only 25 percent of managers which were rated a 5 included ESG policies in their LPAs.

Smaller firms have difficulty squaring ESG with other key priorities when starting out, said Eamon Devlin, managing partner of MJ Hudson Law.

“When a new PE firm is set up, they’ve got a critical list; items to deal with, and LPs aren’t (yet) making ESG critical for all firms. They’re looking at other essentials such as investment strategy, team make-up, and the track record of the individuals,” said Devlin.

However, ESG will only increase in importance for both managers and investors, Devlin added.

“ESG is on a journey and it’s become much more important than it was two years ago. As larger firms integrate it into their operations, it provides example policies for smaller firms to follow,” Devlin commented.

“Overall, I think ESG is here to stay and will develop. It seems to be a generational change — younger people are more aware of the impact that corporate investment has on the world. That has been a real driver of making ESG more relevant,” he added.