Though private equity is today painted by some as an asset class of villains and looters, more of its members are concerning themselves with corporate social responsibility. The United Nations’ Principles for Responsible Investment, an initiative launched in 2006, is picking up steam: at this point some 45 private equity firms and funds of funds have signed on to the principles, and six GPs have joined the UN PRI steering committee.
The latest to join, energy focused firm First Reserve, says that its decision to join the committee was very much LP-driven. Four of the five LPs on the steering committee are investors in First Reserve funds, and those LPs made it clear that the principles are important to them. First Reserve’s LP base across the board has been increasingly asking about the principles as well, First Reserve’s Cathleen Ellsworth told PEM. It’s not just the European LPs either – It’s truly a global phenomenon, she said.
Being a signatory to the UN PRI will change the way that managers run the firm. Broadly, the principles mandate that managers consider environmental, social, and corporate governance (ESG) issues in their investment analyses and decision making processes.
Many firms say they already do this. First Reserve says it didn’t have to change anything about its investment policies to comply with the principles. The most difficult part of signing onto the UN PRI is likely to be complying with the increased reporting and transparency requirements, not the ESG guidelines themselves.
It’s a common refrain these days: more disclosure, more detailed reporting. Specifically, the UN PRI requires that firms:
• Disclose how ESG issues are integrated within investment practices
• Disclose active ownership activities (voting, engagement, and/or policy dialogue)
• Disclose what is required from service providers in relation to the Principles
• Communicate with beneficiaries about ESG issues and the Principles
• Report on progress and/or achievements relating to the Principles using a 'Comply or Explain'1 approach
• Seek to determine the impact of the Principles
• Make use of reporting to raise awareness among a broader group of stakeholders
It seems that no private equity firm in any part of the world will escape the demand for more disclosure and accountability, whether from governments and financial regulatory bodies, or from their own LPs.