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Private Market Allocators Are No Longer Taking a ‘Wait-and-See’ Approach to ESG
As interest in sustainable investing continues to rise, both limited partners and managers are taking ESG more seriously, according to PitchBook.
Private market investors have been slower than their public market peers to adopt environmental, social, and governance strategies — but that’s starting to change.
Pitchbook’s 2021 sustainable investments survey — which was released Friday and included responses from 457 limited partners, general partners, and other investment professionals — found that 46 percent of respondents were increasing their focus on sustainable investing this year, while 43 percent were maintaining their current focus. In addition, 64 percent of GPs and service providers said that LPs had expressed increased interest in sustainable investment issues over the last three years, up from 58 percent of respondents in 2020.
“This ESG thing isn’t going away,” Hilary Wiek, lead analyst at PitchBook and author of the report, told Institutional Investor. “More and more LPs are making these commitments.”
In the report, Wiek wrote that many respondents attributed the rise in ESG interest to major events of the last two years, including the Covid-19 pandemic, climate-related disasters, and the Black Lives Matter movement’s heightened presence in the summer of 2020. But, Wiek said, sustainable investing in private markets has also been a long-time coming.
“Private markets are still trying to feel their way through this impact investing and ESG stuff. A lot of investors on the asset manager side have felt, for a long time, that they knew what they were doing, they were making money, and people can do that stuff somewhere else,” she said.
But as more and more funds came to the market, investors began to wonder what managers were doing about emerging risk factors, including ESG, Wiek added.
“Now, I think there is finally a pretty big movement in the private markets to be considering these factors, even though they were a little late to the game,” she said.
While Wiek reported that there were still some “wait-and-see” attitudes among allocators in 2020, she said those views have mostly dissipated.
“LPs take a while,” she said. “You have to wait ’til the next committee meeting. But now that they’ve had a year to ponder it, they said ‘Yes, for sure. This is happening.’”
For LPs and GPs alike, sustainable investing is not just about altruism: It’s about returns. According to the report, when asked whether they prioritized either sustainable investing or strong performance when considering a potential investment opportunity, the majority of respondents — both GPs and LPs — said they prioritized both.
“Folks that are working on ESG risk factors have made a good case that this isn’t touchy-feely, tree-hugging stuff anymore,” Wiek said. “This is, if you’ve got property in low-lying areas, the oceans are rising and you should probably have a plan for that. That is a risk. It’s not showing up on a balance sheet or a financial statement, but we need to start measuring and preparing for these things if you want your company to survive.”
But as interest in sustainable investing heightens, LPs and GPs are facing new challenges. There is an oversaturation of investment data and “none of it rolls into something that’s reportable and explains how investment dollars are impacting the world,” Wiek said.
Both GP and LP respondents to the PitchBook survey were most concerned with the murky definitions and measurements of impact outcomes. Respondents were also worried about the lack of robust data on ESG factors for private equity companies and the difficulty of benchmarking non-financial goals.
“Everyone everywhere is struggling with this,” Wiek said.
A large part of the problem is the lack of a singular, industry-wide framework for measuring investment impact, Wiek said. Instead, GPs and LPs use a slew of different standard frameworks or develop their own portfolio-specific methods. As a result, it’s nearly impossible for GPs to compare company metrics and for LPs to assess individual managers’ impact profiles.
“There are groups that understand that this is a problem, and they’re trying to figure out how to align the entire industry into some sort of framework,” Wiek said. “We just need to get to a point where everybody’s thinking about these risks the same way so that the information can be much more applicable and usable.”