Every few years – or indeed months, in some economic climates – the balance of power between fund managers and their investors shifts back and forth. In tougher times, LPs can call the shots; in buoyant markets, GPs can gain ground.
But when it comes down to it, the power to really move the needle within the industry as a whole lies with the person with the chequebook. Such was the case with responsible investment.
“Originally it was the LPs, in particular some of the larger northern European asset managers, who really focused on the topic and requested that GPs embrace ESG in order for their funds to qualify for commitments,” says Ellen de Kreij, ESG implementation lead for Apax Partners.
This year marks the 10th anniversary of the launch of the United Nations-supported Principles for Responsible Investment (PRI), and thanks to both this initiative and the push from investors, the private equity industry has made huge strides within the responsible investment arena in the last decade.
“Once the industry gets going, it really gets going and many managers have since stepped up and developed their responsible investment approach,” de Kreij says.
However, it shouldn’t stop there. “Pretty soon the LPs will need to raise the bar again. Now that they’ve seen that the industry is responding, [they need] to say, ‘This is where we would like you to go next with your ESG approach,’” de Kreij says.
Mark Goldsmith, a former director in the responsible investment team at emerging markets specialist Actis, has recently set up Fiveoak Consulting to provide sustainability services to the financial services sector. He agrees that, unlike in recent years, the push now is to engage more LPs.
“The LPs were instrumental in taking the lead – and you can see that with the sign-up to the PRI – and now I think some of the GPs are keen to take the initiative and are really committed to this,” he says. “One of the focuses [the PRI has] for this year is to encourage more LPs to sign up.”
Events in the wider market in 2015 are galvanising factors for LPs, says Goldsmith, from the COP21 climate conference in Paris and the agreement of the UN Sustainable Development Goals to scandals including Volkswagen’s emissions tests and corruption at Brazil’s state oil company Petrobras.
Marleen Groen, senior advisor to StepStone and director at impact manager African Wildlife Capital, also sees the progress made at the Paris climate conference as an additional driver for LPs beyond responsible investment and toward social and conservation impact investing.
“Institutions such as public pension funds and family offices have been sticking their heads together to try to figure out how they can invest in appropriate social and conservation impact funds and what the right fund parameters need to be,” she says.
“As soon as we can actually work out how to measure social returns or conservation returns in addition to the financial returns, many institutions will seriously look at investing in impact fund vehicles that aim to give them effectively both an internal rate of return and an external rate of return.”
Back when the PRI was launched, the LP community asked and the fund managers delivered. To make such dramatic progress in the next decade, it’s time for investors to ask again.