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Firms fall short on ESG expectations

Buyout firms are citing a lack of internal capacity and expertise as a barrier to meeting investors’ unabated interest in responsible investment, according to a PwC study.

Only two in five GPs have in place systems that can measure the value created from an environmental, social and corporate governance (ESG) policy; while half of private equity firms say they lack even a formal policy on responsible investment, according to a PricewaterhouseCoopers study on the matter. 

Firms said a lack of internal resources and difficulty in finding the right expertise have resulted in their ESG efforts becoming focused on a sub-set of companies in the portfolio, rather than an across-the-board approach. 

Consequently some GPs are offering ESG training to deal teams and securing external expertise when required, if building an in-house ESG team was out of the budget, the study noted. 

The findings come at a time when institutional investors themselves – many of whom are signatories to the United Nations-backed Principles for Responsible Investment – are under increasing pressure to follow a sustainable investment strategy, with the majority of GPs believing LP’s attention to ESG issues will only increase in the years to come, according to the study. 

“Allocations of funds to private equity in some pension schemes is increasing and scheme trustees are being encouraged by various parties, including government, to ensure that they act as responsible investors,” said in a statement Andrew Evans, a PwC pensions partner. 

Fewer than half of respondents said they provided investors with no, or limited, reporting on their ESG policies. Those that do report sometimes rely on case studies, an effective strategy, but one that can come across as cherry-picking certain portfolio companies over others, the study warned. 

Respondents included 11 of the top 50 largest global private equity houses, with the remainder made up of mid-tier firms, according to PwC. 

“Many private equity houses commented on ESG as an ‘imprecise science’ that will evolve over time but in such a competitive fundraising environment, investors may not be so patient,” said Malcolm Preston, PwC’s head of sustainability and climate change.