ESG integration is gaining more traction in private equity. Robeco’s latest Private Equity Engagement Report concludes that fund managers in the company’s private equity ESG Program have taken further steps to embrace ESG factors and integrate them into their investment processes.
“If we look at the activities of PE fund managers in the last year, we can conclude that ESG factors have become further integrated into their investment process.”, states the report in its introduction. Recommendations by the Financial Stability Board’s Task Force on Climate Related Financial Disclosures, the adoption of the European Commission’s Action Plan on Financing Sustainable Growth and the publication of a guidance document on ESG Monitoring, Reporting and Dialogue in Private Equity by PRI suggest that this positive trend will continue.
In the twelfth edition of the ESG Engagement Report1 Robeco Private Equity documents the activities of PE managers that are part of its ESG Engagement Program.
2017 was a year in which General partners (GPs) continued to strengthen their ESG integration in investment, monitoring and reporting practices which has translated into stable overall ESG scores.
The average ESG score for the 63 fund managers that participated in last year’s survey was 69%, compared to 66% in 2016 and 59% in 2015. Meanwhile, the median ESG score stands at 69%, versus 69% in 2016 and 64% in 2015. These figures indicate that most fund managers now have functioning ESG frameworks in place.
The results are based on an annual assessment by Robeco Private Equity that uses a reporting and assessment tool developed by the UN Principles for Responsible Investment (PRI). A growing number of investors in the private equity world are now signing up to the PRI and its goals.
The reputational risk of private equity portfolio companies monitored by Robeco Private Equity remains relatively low. The analysis of ESG-related news stories and alerts by RepRisk2 shows that the majority were not involved in any ESG-related incidents. Those that received negative media attention experienced relatively low impact and coverage. To increase awareness of ESG issues and encourage better communication, Robeco Private Equity continuously engages with fund managers whose portfolio companies have had to deal with incidents.
In their role of active owner of portfolio companies and the extended control this entails (compared to public companies), the PE managers are in a good position to promote the UN Sustainable Development Goals (SDGs3).
In 2017 the number of PE fund managers that committed to contributing to these SDGs increased further. In terms of the contribution to specific goals, most portfolio companies contributed to SDG 7 and SDG 12, which relate to sustainable energy and sustainable consumption and production.
Despite the increasing focus on SDGs, the report also recognizes that SDG-related and impact reporting is still in its infancy and most of the managers first need to develop consistent ESG reporting frameworks.
An analysis of how PE managers currently manage climate-related risks and opportunities also indicated that half of the respondents have already incorporated climate-related risks and opportunities into their investment strategy and process in some way. In addition, 38% of the fund managers have integrated their process for climate-related risks into their overall risk management.
However, only 24% of managers currently engage with their portfolio companies to encourage better disclosure and practices relating to climate-related risks. The survey results also showed that only about one-fifth of managers currently use emission data or analysis in investment decision-making. These percentages show clear potential for improvement.
Robeco Private Equity’s ESG Engagement program, introduced in 2014, aims to encourage private equity fund managers to implement ESG best practices in their investment process. Through its ESG activities, which have been recognized by the PRI with an A+ rating, Robeco Private Equity aims to draw the attention of PE managers to ESG issues and assist them in their efforts.
As part of the program, private equity fund managers undergo an annual ESG assessment which serves as input for dialogue on potential improvements. Robeco Private Equity’s ESG engagement program strives to contribute to improving the risk-reward characteristics of client portfolios and enhance the added value of private equity fund managers.
1 Please note that we have changed the year referencing in the title of our annual ESG engagement report. The data that fund managers reported to us relate to the end of calendar year 2017, but the report was written and published in 2018. Henceforth the year of publication will therefore be recorded in the title of our annual ESG reports.
2 RepRisk, a leading business intelligence provider specialized in environmental, social and governance risk analytics to monitor the reputational risk of portfolio investments.
3 SDGs represent the global sustainability agenda for 2030 and provide a systematic framework for dealing with the most pressing social and environmental challenges globally.