LGT: US ‘a concern’ as ESG progress slows

An unwillingness to improve ESG standards over a number of years could impact LGT’s desire to re-up with some existing GPs.

A lack of significant progress in environmental, social and governance improvement among US private equity managers is “a bit of a concern” for LGT Capital Partners, according to managing partner Tycho Sneyers.

Forty percent of US firms in LGT’s fund of funds portfolio had ‘excellent’ or ‘good’ ESG ratings in 2018, up just 2 percent from last year, the firm’s latest ESG Report found. This is compared with 75 percent of European managers, a 9 percentage point increase on 2017.

“We don’t see many of our [US] managers taking the additional effort, which is a bit of a concern,” Sneyers – who was elected to the UN-supported Principles for Responsible Investment board in December – said in London at a presentation on Wednesday. “Many of the US managers who raise money outside of the US definitely do better [because] they get pushback.”

An unwillingness to improve ESG standards over a number of years could impact LGT’s desire to re-up with an existing GP, Sneyers added, noting that “some managers will drop off the list”.

Improvement could slow further under the Trump administration, with the US’s intended withdrawal from the Paris Agreement on climate change among the potential blows. Sneyers denied the possibility of a regression in US ESG standards, pointing to increased focus from large state pensions which “set the tone” for private equity.

The California Public Employees’ Retirement System, the US’s largest public pension with $356 billion in assets under management, is one example. It adopted a five-year strategic plan in 2016 focused on ESG principles such as corporate reporting standards, diversity and inclusion and sustainable investment research.

Nearly half of the 115 LPs in Private Equity International‘s LP Perspectives Survey 2018 said ESG was “becoming a more regular consideration” in fund due diligence, with 22 percent saying that it was “always a consideration” and 11 percent saying they considered it “vital”.

ESG standards among Asian GPs declined this year with 50 percent rated in the top-two quartiles, compared with 56 percent last year, according to the report. LGT attributed the drop to a significant increase in its Asian portfolio since last year, largely through the secondaries market.