ESG-complacent GPs, you have been warned

When the conference series began in 2010 the conversation around responsible investment revolved around ‘why’, noted the forum’s chairman Adam Frost in his opening remarks. Today, that has moved to ‘how’.

The comments from Frost, who leads responsible and impact investment at Partners Group, were echoed by a number of panellists and delegates who also observed that the conversation was now more focused on opportunities rather than just thinking of ESG in terms of exclusions and risk mitigation.

Here’s a round-up of some of the issues prevalent in discussions over the course of the Forum:

INVESTORS CONSIDER ESG A MUST-HAVE

LPs both on panels and in the audience agreed that, for them, a good attitude from GPs towards ESG is no longer negotiable. Anders Stromblad, head of external managers at Swedish pension fund AP2, told delegates that the fund would not invest in a manager if it didn’t take ESG into consideration. Meanwhile, Aberdeen Asset Management senior investment manager Mirja Lehmler-Brown said she had turned down two funds this year that it was “crazy” to reject from a financial perspective, but “how they were dealing with ESG was not at the standard that you would expect”. Fund managers, you have been warned.

ENGAGEMENT IS ESSENTIAL

Delegates heard time and again how engagement – between the LPs and the GPs, and between GPs and their portfolio companies – was the key to success in both evaluating ESG capabilities during due diligence and implementing effective ESG policies. What’s more, focusing on the opportunities and potential improvements from ESG, rather than treating it purely as a compliance exercise, can help bring management teams on board.

MATERIALITY IS STILL A STICKING POINT

A key topic of discussion at last year’s Responsible Investment Forum, the issue of materiality was once again a focus. How do GPs determine what is material information to collect on a portfolio company? Should LPs have an input in the decision of what is material? Many questions around this topic remain, but a helpful takeaway from the discussion is that there needs to be an established feedback loop. LPs, GPs need to know why you are asking them for this information, why it is material for you. And GPs, LPs need to know what it is you are intending to do with all of this information you’re collecting from your portfolio companies.

LANGUAGE CAN BE A ROADBLOCK

ESG. Climate change risk. Material impact. There are certain terms that are part of the everyday vernacular for those working in the sustainability field. However, panellists agreed that it’s important not to get too bogged down in language when working with both deal teams within fund managers and with management teams within portfolio companies. There’s a good chance that a number of ESG issues are being addressed as a matter of course. It’s highly likely that deal partners have thought about flood risk without considering it as part of a strategy to address climate change risk.

WE’RE NOT THERE YET

Conference co-host, the UN-supported Principles for Responsible Investment, is celebrating its 10th anniversary this year, and responsible investment has certainly come a long way in the last decade. Today, PRI has 1,500 signatories representing $62 trillion under management, half of which is invested in alternative assets. However, as PRI managing director Fiona Reynolds said, there’s still a lot left to be achieved. For one, not all of that $62 trillion is invested responsibly. An important next step is to move from an awareness of ESG issues and the development of processes to effective implementation and, critically, measurement.

In the words of Reynolds: “At the end of the day, we’re all really here to create impact in investments, not just have processes in place.”