European LPs: anti-greenwashing regulation won’t work

According to a new report, more than half (56%) of European investors don’t think anti-greenwashing regulations will make it easier to distinguish true environment-related claims from greenwashing.

Coller Capital’s Private Equity Barometer Winter 2021-22, found only 44% of European LPs are optimistic about anti-greenwashing regulation achieving this goal in the next three years. In comparison, 67% of Asia-Pacific LPs believe new regulations will help to combat greenwashing, along with 58% of North American LPs who feel the same way.

“European LPs have a good appreciation of the challenges of regulation being able to draw the right lines,” said Iyobosa Adeghe, investment principal at Coller Capital. “It’s been top of mind for a lot of regulators in recent years, and given that Europe is ahead of other regions when it comes to the ESG journey, it’s understandable why European LPs may have a more nuanced view on anti-greenwashing regulation would achieve just that.”

Regarding fund commitments, the Barometer found more and more LPs globally, are refusing to commit to funds on ESG grounds. European LPs are ahead of the game with this, as 56% of respondents this year said they have rejected potential fund commitments on ESG grounds. This percentage has increased from a third of investors who cited this in Coller’s Winter Barometer in 2016-17.

Additionally, a third (33%) of Asia-Pacific LPs have said they refused to commit to funds on ESG grounds, along with a quarter (25%) of North American LPs.

In some ways, the percentages likely show the journey of where each region currently is, within their ESG journey. “The focus on ESG is not going away, and I’d imagine over time, North America and Asia-Pacific LPs are somewhat playing catch-up with their ESG progress, relative to Europe,” added Adeghe. “I would think regional approaches will harmonise over time.”

Regulation

More than half (59%) of LP respondents expect to see more government regulation of private equity outside their own home market in the next few years, while 41% don’t expect to see an increase.

Furthermore, when considering if the private equity industry will be forced to self-regulate in the next few years, 59% of LPs said social pressure will ultimately necessitate it, while 41% of respondents believe responding to formal/government regulatory requirements will continue to suffice.

Social media

According to Coller, LPs are increasingly monitoring social media counts of individual GP team members, with 29% of respondents stating it’s already part of their due diligence, while 39% said they will start to do it.

On the flip side, a third (32%) of LPs said they’re unlikely to start monitoring social media accounts.

“I believe we’d be seeing this increased monitoring of social media accounts even without Covid,” said Adeghe. “It’s another avenue for getting a perspective on the views and focus areas of senior team members of a GP.”

Cyber security

Given that the industry is undergoing its own digital transformation, which has been accelerated by the pandemic, it’s no wonder that cyber attacks have increased.

Of those surveyed, 67% of LPs expect an attack on their own organisation in the next five years, while a tenth (9%) of investor respondents have already suffered a cyber incident in the last five years.

Understandably, with the increase in cyber attacks comes an increase in preparation. According to the Barometer, most (72%) of LPs will demand cyber security risk assessments by their GPs’ management companies in the next three to five years. A further 55% of respondents said they will require similar checks for their GPs’ portfolio companies during the same time period.

Virtual-only due diligence

Despite private equity ultimately being a relationship-based industry, more LPs made first-time fund commitments to GPs without face-to-face due diligence in the last 18 months. Broken down, this was reported by 49% of North American LPs, 44% of European LPs and 28% of Asia-Pacific LPs, in Coller’s report.

Going forward, North American and European LPs appear to still favour going back to more face-to-face meetings, with only 34% and 35%, respectively citing their plans to commit to virtual-only due diligence in the next 18 months. However, half (50%) of Asia-Pacific LPs are planning to stick to or go ahead with virtual-only due diligence in the next 18 months.

“The due diligence process spans all manner of activities,” explained Adeghe. “Even without sitting across from one another, the process still provides many data points to draw on, to feel comfortable that the person you are speaking with is real, their office is real and their processes are truly as described.

“Given that there are now newer considerations, such as travel in relation to climate change, it makes sense in some cases, that LPs are more okay with considering virtual-only due diligence in order to align with their overall ESG strategies too.”

Coller Capital’s Private Equity Barometer Winter 2021-22, was undertaken between 28 September and 9 November 2021 by specialist alternative assets research firm, Arbor Square Associates.

The survey received responses from 102 investors in private markets. Of which, 42% came from Europe, 40% from North America and 18% from Asia-Pacific.

Broken down, investor respondents include insurance companies (22%), bank/asset managers and public pension funds (both 21%), sovereign wealth funds/government-owned organisation (12%), family office/private trust and corporate pension fund (both 10%) as well as endowments/foundations (4%).