STUDY: Private Equity Firms Leverage Environmental, Social, and Governance Initiatives to Mitigate Risk and Create Value Across Their Portfolios
Malk Partners’ Second Study Reveals ESG’s Drivers, Communication Mechanisms, and Effective Management Programs
(June 10, 2013) – Today, Malk Partners (MP) released ESG in Private Equity – 2013. The study is distinct because it draws on primary source research from extensive conversations with senior members of global private equity general partners (GP) and limited partners (LP) to identify year over year trends in drivers of ESG adoption, communication of management efforts, and organizational structure of responsibilities across the investment cycle.
“As a responsible investor and limited partner of numerous private equity funds, we applaud ESG in Private EquitySM – 2013 as an excellent source of market intelligence and resource for best practice,” said David Russell, Co-Head of Responsible Investment at USS Investment Management.
“ESG is an important element of our investment strategy, and as this study confirms, it is likely that our LPs will reinforce this agenda,” said J. Taylor Crandall, Managing Partner at Oak Hill Capital Partners.
Select participants include APG, AXA Private Equity, CalPERS, PGGM, Quartilium, Tredje AP-fonden (AP3), USS, Abraaj Group, Actis, Blackstone Group, Carlyle Group, Clayton, Dubilier, & Rice, Doughty Hanson & Co., KKR & Co., Oak Hill Capital Partners, and TPG Capital.
“This study is particularly valuable because it provides important information to the investment community on the evolution of ESG issues in the private equity sector, stated Beth Lowery,” Senior Advisor, Sustainability/ESG at TPG Capital. “It will prompt continued productive dialogue among GPs, LPs, and other interested parties on how to best reduce risk and create value when addressing these critical issues.”
Malk assessed responses to determine year over year changes and reveal trends in LP and GP ESG drivers, commitments, and practices. Particularly noteworthy trends include:
- 58% of LP participants have increased their commitment to ESG management in the previous 12 months. 42% indicated that their commitment remained stable.
- 75% of participating LPs inquire about GP ESG management during fund manager selection.
- GP disclosure to LPs is moving beyond describing management processes to explaining process implementation. While 75% of participating LPs prefer or require ESG disclosure in the forms of incident alerts and process explanation, 33% now favor disclosure of process implementation in case studies and annual reports.
- 74% of GP participants have increased their ESG commitment in the previous 12 months, with 26% indicating no change in commitment level.
- GP participants point to LP expectations (84%) and cost savings (68%) as driving ESG adoption.
- Leading firms are developing integrated ESG programs by building firm-wide awareness and engaging investment, operating, investor relations, and ESG professionals to drive ESG management across the investment cycle.
“Our study shows that ESG management is growing up. Over the past year, more private equity firms have initiated ESG efforts. Those with programs are pushing further. As a relatively young concept in private equity, ESG management is catching on as an important area to align GP performance with LP interests,” said Andrew Malk, Managing Partner of MP.
The study is MP’s second assessment of the state of ESG management in the private equity sector (click here to download ESG in Private Equity – 2012).