Private equity and hedge fund investors increasingly focusing on outcomes as ESG integration deepens

A new report from LGT Capital Partners (LGT CP) shows that alternative investors are increasingly focusing on ESG outcomes in order to address key issues including climate change and diversity & inclusion (D&I).

The ninth annual ESG Report from LGT Capital Partners analyses the activities of 344 managers globally (including 267 private equity managers) and assesses the improvements made in ESG practices. The ESG Report also details a new framework employed by LGT CP to assess the physical and transition risks of its private debt portfolios. In addition, LGT CP shows how it is aligning the carbon footprints of its hedge fund and other liquid portfolios to the requirements of the Paris Agreement.
 
Significant improvements can be seen in the extent to which private equity managers integrate ESG into their investment activities over the last five years. LGT CP finds that 68 per cent of managers now have strong ESG practices in place, an increase of 18 per cent compared to 2016. In addition, leading managers have begun to adopt a more outcome-oriented approach to ESG:
 
• 34 per cent of private equity managers specifically address climate change within their ESG policies
 
• 32 per cent of private equity managers are actively assessing climate change risk within their portfolios, an increase of 9 per cent compared to 2020
 
• 28 per cent of managers are actively measuring the CO2 emissions of their portfolio companies, reflecting the depth of their commitment to actively monitoring climate change risk
 
• 50 per cent of all private equity managers have a formal diversity & inclusion policy in place, while 48 per cent consider these issues in investment decision-making. The latter is an improvement of 6 per cent compared to 2020 figures
 
A similarly outcome-oriented approach is seen within private debt, where 45 per cent of LGT CP’s private debt portfolio companies now report on CO2 emissions, an improvement of 25 per cent over the last five years.
LGT CP manages physical and transition risks in private debt portfolios
LGT CP has developed a new approach to managing climate change risks in its private debt portfolios, in line with the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD). The framework enables LGT CP to analyze climate resilience of potential portfolio companies in terms of physical risks (related to climate change itself) and transition risks (related to the transition to a lower carbon economy). On the back of this, the firm rates the materiality of such risks, which allows for informed asset selection based on climate change considerations, as well as effective monitoring of these risks.
 
The number of hedge fund managers achieving top ESG ratings has risen to 25 per cent in 2021, an increase of 8 per cent compared to 2020. This reflects the improvements following engagement with underlying managers over the last year. Moreover, LGT CP no longer has exposure to any hedge fund managers with ‘poor’ ESG ratings. Over the last twelve months, LGT CP has also extended its analysis framework to consider how certain hedge fund trading strategies can positively or negatively affect the carbon footprint of a portfolio. The firm has started to bring its hedge fund portfolios in line with the emissions targets (limiting climate change to well below 2°C) of the Paris Agreement.
 
Commenting on the ESG Report 2021 findings, Tycho Sneyers, Managing Partner at LGT CP and board member at the Principles for Responsible Investment (PRI) says: “Our analysis shows a clear trend towards more outcome-oriented approaches in the way managers implement ESG across different asset classes. This reflects the significant ESG progress we have seen over the last five years. Issues, such as climate change, diversity and inclusion, are now very clear priorities for investors, and managers will need to clearly demonstrate how they are positively contributing to address these challenges.”

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