The biggest ESG challenges for PE industry? Data and measurement

Global survey takes industry's pulse on sustainable investing, lifts lid on factors behind decisions

The biggest ESG challenges for PE industry? Data and measurement

While the interest in ESG and responsible investing is undeniable, it still poses thorny challenges and questions for participants in the private-equity space, according to a new survey report from Pitchbook.

Over a 32-day period, the firm conducted a poll of 650 GPs, LPs, and other types of PE participants from eight geographic regions across the world, with only 368 completing the survey. The survey sought out the views of investors and advisors about the rapidly maturing sustainable investment space.

“[W]e use sustainable investing as the umbrella overarching both impact investment approaches and the incorporation of ESG (environmental, social & governance) risk factors into the investment process,” Pitchbook said as a preamble to its survey.

Comparing this year’s results to those from a previous survey it conducted in 2016, the firm found participants have consistently grown to place more importance on a variety of practices to support a sustainable investment program, including “Outlining a sustainable investment philosophy in a limited partnership agreement,” “Appointing dedicated in-house sustainability professionals,” and “Engaging outside experts.”

When asked they focused on most in their sustainable investment efforts, respondents cited business integrity, environmental health and safety, and social issues as the top areas – thematically the same top answers that emerged in 2016.

With respect to the challenges participants face in sustainable investment. The most cited answers by far were “unclear how to define and measure impact outcomes,” “lack of robust data on ESG factors for private equity companies,” and perceptions of potential negative impact on overall returns.”

The other challenges cited by participants included, but were not limited to:

  • Lack of incentive to shift existing approach;
  • Difficulty incorporating the strategies into the overall asset allocation/approach;
  • Creating product that will attract enough investors; and
  • Cost

In a section focused on impact measurement, Pitchbook found that the majority of participants use a custom framework unique to their organization. Within that bucket, the specific responses included “gut feeling,” “proprietary system of more than 2 dozen non-financial metrics,” and “an economic opportunity framework focused on increasing equity, inclusion, and access,” among others.

The survey also asked responding GPs whether they required portfolio companies to focus on financially material ESG risks. That question, Pitchbook said, is meant to address the issue of greenwashing by ensuring efforts at ESG go beyond surface level. Only 25% of those responding to that question said they’re carrying the ESG effort through to portfolio companies.

Still, it seems the seeds of progress are being sown. Only 5% of PE fund managers said that ESG risk factors are “Not at all important” to portfolio company improvements, suggesting they will move toward implementing a strategy to address the issue.


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