You're No Different: Responsible Investment and Private Equity

The Universities Superannuation Scheme and BT Pension Scheme welcome the recent attention paid by GPs to responsible investment.  In many respects, it is a welcome change.  Given the level of attention that environmental, social and governance (ESG) issues have been getting attention from public equities managers and listed companies, we are glad to see that GPs or their portfolio companies are now also active in this space.

We believe that any manager (whether corporate or investment) that does not manage extra-financial issues across their business or portfolio may not be adequately managing all of the material risks or opportunities our investments face and therefore, may not be managing our money as well as they should be. 

This applies to PE as much as it does to listed equities.  Portfolio companies operate in the same marketplace as publicly listed companies, and therefore face the same risks and opportunities from ESG issues.  As investors, we will expect the same level of attention to ESG issues from both our public equities fund managers and our GPs.  Responsible Investment is not asset-class specific - we see this in the context of fiduciary duty across all asset classes and markets

Importantly, we are not alone.  Each of the 500 asset owners, fund managers and investment service providers that are signatories to the UN-backed Principles for Responsible Investment (PRI) - representing over $15 trillion of assets - believe that this is important too. 

What might an LP's interest in Responsible Investment mean for GPs?

Since September 2008, some of the world's largest LPs and GPs have been discussing how to address these issues within a PRI Steering Committee on Private Equity.

We recently surveyed the 15 LPs participating in this Steering Committee, who represent an aggregate allocation to private equity of roughly $150 billion.  The questions focussed on what is expected from their GPs in terms of ESG issues.  While not a statistically significant sample, the some of the responses were illuminating:

 

·          93% planned to prepare a standard ESG questionnaire for all GPs

·          73% thought their GPs should sign a side letter addressing ESG issues

·          86% hope to receive information on material ESG risks in capital calls

·          93% want an annual update on material ESG risks to the portfolio

 

Neither USS nor BTPS would claim to have the only, or best, approach to integrating ESG into our private equity investments.  But through our own work, informed by the work of the PRI, and in conjunction with initiatives such as the BVCA's Sustainability Advisory Board, we expect our activities and processes to improve over time.  We expect the same of our GPs.

Of course, it would be wrong to presume that this agenda will impact all GPs in the same way at the same time.  Here are four steps you can take to help assess if this agenda is a priority for you:

- Have a look at the asset owners / pension funds on the PRI signatory list (www.unpri.org/signatories). If these are the types of LPs you will be talking with in the future, you can expect a greater focus on these issues. 

- Ask your LPs if they have a Responsible Investment policy.

- Ask GP signatories to the PRI why they signed

- Contact the PRI to discuss in more detail

Donald MacDonald is a Trustee of the BT Pension Scheme, and Chair of the Principles for Responsible Investment, an investor led initiative supported by UN Secretary General Ban Ki-moon.

David Russell is Co-Head of Responsible Investment at the Universities Superannuation Scheme.  David is a member of the PRI's Steering Committee on Private Equity, and a member of the BVCA's Sustainability Advisory Group.

Tom Rotherham leads the PRI's Workstream on Private Equity, and is Head of Corporate Responsibility at Radley Yeldar.

Susan Flynn is a Director at Hermes Private Equity, and represents the Private Equity Investors' Association (PEIA) on the BVCA's Sustainability Advisory Group.  Hermes was a founding member of the Principles for Responsible Investment.

For more information on the PRI's Workstream on Private Equity visit www.unpri.org/privateequity or contact tom.rotherham@unpri.org.

  

FAQs

What is Responsible Investment?

Responsible Investment is a mainstream agenda focused on maximising long-term risk-adjusted returns. Responsible Investment is generally not considered to include charitable donations, venture philanthropy or other investment models not primarily targeted at maximising financial returns for investors. 

Broadly speaking, Responsible Investment involves the application of one or more of the following three screens:

- Negative / ethical screens: exclusions for certain sectors (e.g. tobacco, arms manufacturing), countries (e.g. sanctioned by the UN Security Council). 

- Active ownership and integration: identifying and addressing across all investments the material risks and/or opportunities associated with environmental, social or governance issues. Where ESG issues are material, investors then engage to ensure that they are integrated into investment decisions and appropriately managed.

- Thematic investment: i.e. investments in sectors that are perceived to contribute to important public policy agendas, such as clean tech, education or healthcare.

Large institutional investors cannot reduce their investment universe (decrease potential for diversification) without also increasing risk to their portfolio.  As a mainstream initiative, most large institutional investors focus primarily on active ownership and integration: i.e. how might ESG issues impact on the success of any company in any sector in any part of the world.

What is Corporate Social Responsibility (CSR)?

What investors are ultimately interested in is management of risk and opportunity in the portfolio company (whether public or private), as these can impact returns.  While the term Responsible Investment applies to investors, the term CSR is often applied to companies.  Terms such as Corporate Responsibility, Sustainability and Corporate Citizenship are inconsistently applied, but generally considered to mean the same thing.   

While CSR may include charitable donations, most companies understand CSR to mean a focus on the extra-financial issues that can positively or negatively impact on the development or implementation of their corporate strategy.  Just as Responsible Investment is a mainstream agenda, so too is CSR. 

Leading companies talk about CSR in the context of:

-  Reducing risk

-  Improving operational efficiency; and

-  Maintaining long-term growth

What are the PRI Principles?

PRI signatories commit to six aspirational Principles, which are neither prescriptive nor compliance-based.  They set a direction: it is up to each Signatory to find the best path to implementation across all asset classes.

The 6 principles are:

-  We will incorporate ESG issues into investment analysis and decision-making processes.

-  We will be active owners and incorporate ESG issues into our ownership policies and practices.

-  We will seek appropriate disclosure on ESG issues by the entities in which we invest.

-  We will promote acceptance and implementation of the Principles within the investment industry.

-  We will work together to enhance our effectiveness in implementing the Principles.

-  We will each report on our activities and progress towards implementing the Principles

The Principles and a list of possible actions to implement them are available at: www.unpri.org/principles

 

Does the PRI have any Private Equity Signatories?

In the last 6-12 months, there has been a growing interest in the PRI from the GP and Fund of Fund community.  The following are some of the PRI signatories from the private equity sector: 

 

-          Actis

-          Anancia Capital

-          BaltCap

-          Capital Dynamics

-          Cordiant

-          Doughty Hanson

-          Growthworks Capital

-          HamiltonLane

-          Impax Asset Management

-          Industry Funds Management

-          Kohlberg, Kravis, Roberts & Co

-          LGT Capital Partners

-          NSG Capital

-          Pantheon Ventures

-          Partners' Group

-          PCG Asset Management

A full list of PRI signatories is available at: www.unpri.org/signatories