Multi-asset manager LGT Capital Partners has teamed up with service provider RepRisk to set up an ESG warning system for portfolio companies as its own research identified the ESG leaders and laggards among the GPs it backs.
The LP – a US$55bn-AUM player invested in PE through primaries, secondaries and co-investments – used an event in London today to showcase the scheme, which will see RepRisk continuously scan more than 80,000 news sources in 15 languages in search of “ESG controversies” around 6,000 PE-backed businesses.
“We wanted to have an independent verification system, make sure we could find out about ESG issues even before our GPs had reported them, or even knew about them,” LGT managing partner Tycho Sneyers said at the event, attended by The Drawdown. “We’ve worked quite a long time to make sure the system had good coverage but it is now all ready.”
Politics trump responsibility
LGT’s new monitoring system comes after its latest update on the ESG state-of-play across 202 of its private equity GP investees. The 2018 report confirmed the progress seen in recent years – from 27% of LGT’s GPs ranked as excellent or good in 2014 to 58% in 2018 – and corroborated, with figures, long-held assumptions in private equity ESG: larger firms were found to be more ambitious, while US players remained, despite progress, behind their European and Asian counterparts.
The relative lack of change in the US is a bit of a concern. We don’t expect a regression with Trump but the current political climate … probably isn’t helping”Tycho Sneyers, LGT
“We were initially surprised to see Asia overtake the US, but we’ve come to realise the ESG mindset is more deeply embedded in Asia as GPs, particularly in the early stages, rely on development finance, which comes with certain restrictions,” Sneyers commented. “The relative lack of change in the US is a bit of a concern. We don’t expect a regression with Trump but things like the current political climate, the withdrawal from the Paris Agreement, probably aren’t helping. The current direction of the US debate around ESG and fiduciary duties, for instance, is a bit unclear.”
Tough on ESG
In recent years, momentum around ESG and impact has pushed fund managers into the space, prompting greenwashing warnings from world authorities. Guides have been published to help GPs and LPs achieve a sound interaction but judging by recent polls, LPs remain unconvinced by the quality of some GP strategies – the lack of data to assess ESG alignment is a key concern.
In LGT’s case, the LP’s next step will be to follow up with the 83 fund managers – private equity and otherwise – with the lowest ESG scores. “We could get tougher over the years if things really don’t improve but as a first step, we want to give engagement and guidance a real chance,” Sneyers said. “If as a LP you don’t re-up, you lose access and the ability to influence. We hardly ever come across GPs who don’t have the will to at least discuss potential ways to improve.”
The LGT managing partner, who in February spoke to The Drawdown about his priorities as the PRI board’s first PE member, anticipated an ESG future where impact measuring will be key; the globally-agreed Sustainable Development Goals (SDGs) could be, he added, a sound starting point. “With PE, we’ve started to try and link some of our KPIs to relevant SDGs. Much of our thought leadership will go into continuing that.”