The majority of Asia-Pacific investors in private equity monitor, or expect to monitor, general partners’ environmental, social and governance (ESG) policies, in contrast to 70% of European investors and 27% of North American investors, according to Coller Capital, a private equity fund that invest in the secondary market.
“Speaking anecdotally, ESG is something investors have bumped up the list,” said Jon Freeman, a partner at Coller Capital. “I have seen this a lot from Australian and New Zealander clients – they ask UNPRI questions. It’s something we see a lot more often.”
Investors and potential investors are increasingly asking Coller Capital for ESG information before investing, Freeman said.
“We see a lot more of UNPRI questioning,” he said. “We have to audit through to underlying companies in the GPs, which we can do. We sit with two hats as a secondaries player – we are an investor – a LP, as well as a GP.”
Freeman said Coller Capital work with industry body the Institutional Limited Partners Association (ILPA) on ESG related work.
While Coller Capital didn’t probe into the motivation for limited partners’ scrutiny of ESG issues in general partners’ (GP) businesses, nor did it probe into the regional divergences between Asia Pacific, Europe and North America, Freeman said the differences could be partially attributed to the relative financial situations of the economies.
“It seems that ESG compliance is on investors’ radars in US and Asia Pacific, and the US is more focused on returns – ESG is subordinate to returns there,” Freeman said. “North American investors are worried about what they’re going to get back rather than ESG policies of GPs. … In Asia, compliance and ESG is an issue because people are worried about the tangible parts of ESG – corruption, and what happens if things go wrong environmentally. There is an awareness for that reason. In the EU, there is a higher compliance level and there is much more focus on ESG in the EU, and I don’t think it’s been as much in the regulators’ mind in the US.”
More broadly, the majority of private equity investors in North America and the Asia Pacific believe that GPs need to improve their levels of transparency and risk management, while fewer European investors said that transparency and risk management needed to improve.
“The Asia Pacific LPs were the biggest percentage by far,” Freeman said. “I think there are a couple of issues there – it’s a relatively younger industry and transparency and compliance increases with the age of the market as systems get hammered down. There have also been a number of ESG cock-ups in the Asia Pacific region, like frauds in China, which makes people more aware of transparency and risk management.”
The Barometer researched the plans and opinions of 101 investors in private equity funds. These investors, based in North America, Europe and Asia-Pacific, form a representative sample of the LP population worldwide.