Private equity funds are paying close attention to sustainability issues these days, according to a new study. The development is due partly to increased pressure from investors and partly to structural changes in the industry that require private equity funds to put more of their own capital at risk, said the study, released today by Malk Sustainability Partners in collaboration with Environmental Defense Fund.
The report surveyed 18 organizations in the private equity industry, including both fund managers (GPs) and investors, known as limited partners (LPs). The respondents’ answers showed that a lot more attention is being paid to environmental, social and governance (ESG) issues -- in other words, issues related to sustainable development, environmental stewardship and other non-financial investment considerations.
"This study confirms that ESG management amongst private equity funds now goes well beyond the commendable programs of early adopters. The majority of funds surveyed are working to generate higher returns from actively addressing these issues," said Andrew Malk, managing partner of MSP, in a statement. "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 inclusion of LPs particularly distinguishes this study -- their interest in ESG management is key to the trend of GPs adopting ESG management programs. The GPs ranged from funds with $500 million of capital under management to those with $60 billion investment records.
Although just six LPs were surveyed in the report, they included some powerhouse institutions, including the California Public Employees' Retirement System (CalPERS), the largest public pension fund in the U.S. CalPERS has invested in a green fund, developed an ESG code, and collaborated with consultancy Mercer on a number of ESG-related reports, according to the study.
Other LPs said private equity funds are responding to increased interest from investors in ESG. "My general impression is that ESG issues have risen quite rapidly on the priorities list of private equity general partners," said David Russell, co-head of responsible investment for the U.K.'s Universities Superannuation Scheme, in the report.
Next page: How GPs are integrating sustainability into their practices