News from the Front Line: ESG Insights Issue 3

eFrontNews from the Front Line: ESG Insights Issue 3

Jul

4

July 4 , 2016 | Posted by eFront Solutions |

News from the Front Line: ESG Insights Issue 3

Over the past year, we at eFront have observed interesting trends in the way both LPs and GPs deal with ESG issues, especially how they monitor and report them. For example, we have seen that there is increased pressure on GPs to report ESG considerations, which is largely but not entirely the result of demands made by LPs. Also, LPs are increasingly interested in collecting ESG information at the portfolio company level, in addition to information about their GPs’ ESG policies and practices.

Our observations are consistent with the findings in the PitchBook 2016 Private Equity ESG Survey, sponsored by RR Donnelly. Interestingly, the survey revealed a significant and increasing number of LPs (More than 40% of LP respondents) who would choose managers with strong ESG programs over those who have none, if even fund performance might suffer. Clearly, more and more LPs are willing to pay a premium to work with managers who are already equipped to provide the ESG-related information they demand.

In view of these trends, it’s reasonable to ask why LPs are seeking so much information when they might just as easily delegate all ESG management to their GPs? Our conversations with LPs have revealed two key motivations. First, LPs themselves are under increasing pressure from their own stakeholders. Second, LPs want to exert more influence over the management of ESG concerns.

We have also become aware of an ongoing debate about whether LPs know how to ask for the relevant ESG information at the portfolio company level. If we assume that LPs aren’t adequately knowledgeable, then how can the industry help them?

This issue focuses on ESG monitoring at the portfolio company level to help both GPs and LPs better monitor and manage ESG issues in their portfolio. An article from SASB highlights their standards as a resource GPs and LPs can use to identify and understand the materially relevant ESG issues. An article about the Waterman Group provides insight about the need for GPs to proactively develop effective ESG strategies.

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