Responsible Investment special: USS on ESG and how the climate is changing

What are your major concerns regarding a GP’s ESG practices?

Our key focus with GPs is how they are integrating ESG issues into their decision-making and management processes. These are the core aspects of ESG management that we assess in our due diligence and monitoring programmes.

One area we expect [to make] more requests of GPs is to provide data so that we can undertake carbon footprinting of our private equity funds. USS has undertaken the carbon footprinting for all our investment portfolios, but faced difficulties in private equity in either getting the data or estimating it.  As LPs are required by the Task Force on Climate-related Financial Disclosures to look at climate change and carbon footprints across total funds, the expectations placed on GPs will grow.

What role does ESG play in your fund due diligence?

The scheme has a long history in responsible investment across all asset classes. Indeed, we developed our first policy and strategy back in 1999 so we were one of the pioneers in this area and strongly believe that ESG issues have the potential to impact companies and other assets (both positively and negatively). Our view is that companies are better run if they are managing ESG risks and opportunities and as a result we believe that GPs should be encouraging portfolio companies to manage ESG issues. Therefore, every potential PE manager and investment goes through our responsible investment due diligence process.

USS BY NUMBERS

AUM: £64 billion ($81 billion; €71 billion)

Invested in private equity funds: £8.6 billion

Current allocation: 13.6 percent

Target allocation: 10 percent

Direct investments: Moto

 

What form does this process take?

As an example of how this works, USS has developed its own questionnaire, which is sent to all potential GPs. This questionnaire focuses on the following four areas: How responsible investment issues are considered at the due diligence stage; how extra financial issues are managed in the overall management of assets; the communications associated with ESG issues; and views on the UN-supported Principles for Responsible Investment and other ESG frameworks.

Our work does not stop there, however. We then have a follow on call or meeting to discuss the findings of the questionnaire in more detail, while also carrying out a detailed investigation into the track record of the GP to examine their commitment to ESG in their past investments.

Additionally, we have a process for monitoring the ESG activities of our direct investments whereby a member of our team will visit each company to discuss how ESG issues are being managed. Equally we also engage with companies in which we hold shares on these issues.

Are you surprised that our LP survey found that only a minority of LPs put a big emphasis on ESG in due diligence?

I think this is perhaps a little too simplistic. What this means is that the majority will put some emphasis on ESG in fund due diligence and that would seem to be a positive step forward compared to the past. There is obviously still some way to go, but there is a definite growth in the number of LPs assessing ESG risks in their private equity investment – for example, the level of support shown for the PRI Private Equity group, and the growth in the number of conferences devoted to private equity ESG would be a good indicator of how interest continues to grow.

We believe it’s critical that the oversight of GPs does not end with due diligence and investment – there has to be monitoring of ESG activities post-investment. This serves two purposes: so that LPs obtain assurance that ESG polices are being implemented, and, to continue to signal to GPs that LPs take ESG issues seriously.