Rewarding responsibility

More than one-third of LPs say they have turned away GPs based on an insufficient grasp of environmental, social and governance issues.

Limited partners, especially those in Europe, are unafraid to turn away managers if their policies relating to environmental, social and governance (ESG) issues do not pass muster, according to a survey released in March.

More than one-third – or 39 percent – of LPs have turned a GP away for this reason, according to a survey conducted by PEI. Likewise, 57 percent of the LPs surveyed ranked ESG issues as being either “vital” or “very important” in their fund selection processes.

European LPs are the most ardent promoters of proper ESG management, according to the survey. Nearly three-quarters of those who considered ESG issues “vital” to fund selection were based in Europe, with only 18 percent based in the US.

Attitudes to ESG issues also vary depending on the type of investor, the survey said. Endowments and foundations universally rated ESG issues as “irrelevant” or only “somewhat important”. Fund of funds groups, meanwhile, took a more proactive view of ESG policies; around two-thirds rated ESG issues as either “vital” or “very important”.

ESG considerations are now being incorporated in many funds’ paperwork, with around 55 percent of the LPs saying that these issues were addressed in either a side letter or the limited partnership agreement.

The poll, which surveyed 77 LPs from around the world on their attitudes to ESG issues, was conducted during December 2010 and January 2011 and has been published in PEI’s upcoming book The Guide to Responsible Investment ( Approximately half of the respondents were based in Western Europe, 30 percent were based in the US and the remainder were based across a number of regions, including Asia and Australia.

“More LPs are talking about it; more GPs are talking about it; and more associations have worked on it.  So the market has now moved on to such an extent that LPs probably feel more comfortable asking GPs difficult questions about ESG issues,” said Tom Rotherham, associate director at Hermes Equity Ownership Services and lead editor of The Guide to Responsible Investment.

“What also stood out from the survey was the LP view of the future. 49 percent of respondents said ESG would become more important over the next year, while 88 percent said it would become more important in the next five years. To me this is investors saying ‘I’m not going to add this to an already busy agenda this year, but once the dust has settled we are going to pay it more attention’.”

Of the LPs surveyed, over one-quarter planned to commit more than $500 million to the asset class in 2010 and more than half said they would commit more than $150 million.