Most fund managers seeing rising pressure from investors to adhere to ESG principles to save money and enhance reputation
More than half of private equity fund managers and their institutional investors say they leverage ESG management principles to create value in their businesses, while more than 90 percent say they plan to do so over the next few years, according to a new study.
The survey of global fund managers and investors by management consultancy Malk Sustainability Partners (MSP) and the Environmental Defense Fund also shows investors are increasingly expressing their ESG-related concerns to fund managers and that ‘ESG performance is becoming material to terms of investment agreements’.
The study shows that 54 percent of the funds interviewed have, or are currently developing, an ESG management plan to create greater value in their businesses, often with an emphasis on cost savings stemming from efficiency of resources.
Sixty-nine percent of fund managers also say they have witnessed rising concern from investors over ESG issues in the past three to five years, particularly among European investors but also among investors in North America.
More than 60 percent of survey respondents say cost savings from environmentally friendly measures such as resource efficiency are a major factor spurring interest in ESG issues.
Over the next three to five years, 92 percent of fund managers plan to heighten their focus on ESG management.
‘This study confirms that ESG management among private equity funds now goes well beyond the commendable programs of early adopters,’ says MSP managing partner Andrew Malk in a statement.
‘The majority of funds surveyed are working to generate higher returns by actively addressing these issues. In a private equity investing environment that demands more operational involvement to create value, ESG management practices are being deployed as effective new tools in the investor’s growing toolbox.’
The report also highlights obstacles to ESG management including the lack of clear metrics, although it concludes that a number of measures and tools are becoming increasingly popular, including the UN’s Principles for Responsible Investment (PRI) and the Actis Energy Impact Model.
Following interviews with fund managers and investors, the report identifies some of the more common ESG practices as signing the UN’s PRI, recruiting in-house ESG experts or external consultants and partnering with non-governmental organizations, and performing ESG due diligence as well as more comprehensive related-risk assessments.
‘Interview respondents consistently relate their ESG practices to core strategic objectives, primarily the reduction of operating costs, meeting the expectations of (investors), and driving value creation by enhancing the reputation of portfolio companies or helping them access new markets,’ concludes the report.
‘This finding refutes the common, if increasingly outmoded, view that ESG efforts are citizenship initiatives that are unrelated to or even at odds with value creation.’
