The California Public Employees' Retirement System, so often a bellwether for LP activity, recently unveiled details of its new environmental, social and governance policy.
CalPERS, which first announced its plans for such a policy in August 2016, will now scrutinise its managers' practices more closely, using the UN Principles for Responsible Investment's ESG Disclosure Framework as guidance.
The fact that an investor like CalPERS is only now getting around to formalising its approach to the concept is indicative of the lag between LPs and GPs in the Americas, which have been slow to embrace this element of the investment process, and their counterparts in Europe.
For another indicator of this geographic split: Private Equity International's Responsible Investment Forum – run in concert with UN PRI organisation – has been running annually in Europe since 2009, but only had its first US showing in March.
Adoption and integration of ESG principles happens in baby steps. CalPERS won't be turning away managers just because they have no stated policy on ESG, but it will at least start to weigh this against other factors. It is not alone.
For Tanya Carmichael, head of global funds at Ontario Teachers' Pension Plan in Toronto, ESG is now a mandatory part of the pension's due diligence agenda. “We're not having the why conversation anymore,” Carmichael said at the forum. “Now it's more the how conversation.”
“ESG used to be seen as a value detractor,” Janine Guillot, director of capital markets policy and outreach at the Sustainability Accounting Standards Board, said at the conference. “Now many are talking about ESG as a return driver. I think this is a very long-term game, but I think it's moving very quickly.” Her organisation sets industry standards for corporate sustainability disclosure.
The momentum behind responsible investment was underscored by survey data released in March by private equity investor Adveq and education provider the Chartered Alternative Investment Analyst Association. More than three-quarters – 77 percent – of asset owners, managers and consultants agree that responsible investing is more important now than it was three years ago, while 78 percent anticipate it will be more important three years from now.
The UN Principles for Responsible Investment is also stepping up its game.
Until now fund managers have been able to join as signatories to the principles, and proudly tout this to LPs, based on a membership fee and a stated commitment to integrate the ideas into their investment processes.
The UN PRI is now on an accountability drive; it plans to crack down on signatories who aren't showing progress on the integration of the principles. If you can't demonstrate meaningful movement forward, managing director Fiona Reynolds said at the conference, you will be delisted.
The act of 'greenwashing' – paying lip-service to responsible investment without following through – is set to become that bit tougher. And with LPs getting more serious about integrating ESG principles, GPs will have to follow suit.