Over the last year, limited partners have adapted to holding virtual meetings with general partners, conducted fund due diligence remotely and even committed to new managers without meeting them in-person. Yet there is one issue on which the majority of investors were unwilling to provide flexibility in the middle of the covid-19 pandemic: their commitment to environmental, social and governance issues.
According to Private Equity International’s LP Perspectives 2021 Study, only 12 percent of respondents were open to relaxing their ESG policies as they relate to private markets fund investments in light of the coronavirus crisis.
The importance LPs place on ESG is also reflected in the growing weight conferred upon it in due diligence – 38 percent of respondents say ESG forms a major part of the due diligence process, up from 31 percent last year. Just 12 percent of respondents do not take ESG into account during due diligence.
Rather than stymying ESG initiatives, the pandemic – as well as last year’s Black Lives Matter protests and the wildfires in the US and Australia – galvanised many industry stakeholders to act, or at least to reassess their approaches to responsible investment and ESG risks.
Examples of this can be found in our inaugural Innovators in ESG and Impact Investing list, published this week, which presents ‘30 Big Ideas Shaping ESG’, as well as case studies demonstrating the potential of impact investing. The list includes initiatives designed to mitigate the impact of covid-19, such as impact investor Vital Capital‘s emergency debt facility to help businesses in Sub-Saharan Africa weather the pandemic, and Partners Group‘s Portfolio Employee Support Fund, which included contributions from the GP’s staff, co-chief executives, chairman and founders.
Of course, ESG had already begun gaining traction in private markets prior to the pandemic. The groundwork for many of the ‘big ideas’ that feature in the list had been laid long before the turbulence of 2020. Among these is a mentoring programme run by Actis, which pairs individuals from underrepresented groups in middle management positions at its African portfolio companies with experienced senior leaders from the firm and other businesses in its portfolio. Meanwhile, European GP Investindustrial has ramped up its focus on the ethics and culture of investment targets by creating a proprietary methodology to spotlight potential ethical, integrity and reputational issues during due diligence. This information is presented to the firm’s investment committee as part of initial and final investment recommendations.
Such initiatives could become a key differentiator for managers. In a pan-European survey conducted last year by Invest Europe and Arthur D Little, 72 percent of LPs cited ESG as one of the most important factors when selecting GPs. Yet only 35 percent of the GPs surveyed viewed ESG as a means of differentiating themselves from their private equity peers. This prioritisation gap provides opportunities for managers that stay on top of the ESG agenda, and poses risks for those that do not.