“ESG screen” grows in importance for private equity investments

The majority (62 per cent) of GPs have declined to invest in a company due to ESG or ethical considerations in 2021, according to Investec’s annual GP Trends survey. Last year, this figure stood at 55 per cent, showing the continued and growing importance of ESG to GPs.

Investec’s research, which analyses the views of 219 private equity professionals around the world, shows that GPs’ focus on ESG varies considerably according to factors such as seniority within their firms, gender, and the size and type of fund.

ESG considerations have ‘significantly contributed’ to the decision not to invest in a company for 83 per cent of those below Partner level; but just over half at Partner level (58 per cent) and Managing Partner (53 per cent) level or equivalent. Moreover, 85 per cent of women report having avoided an investment due to ESG concerns, compared to 57 per cent of men.

Larger funds are more likely to halt investment owing to ESG-related concerns. The vast majority (82 per cent) of funds larger than £1billion report having avoided investments due to ESG factors, compared to just 56 per cent of those under £1billion. Infrastructure and energy funds are the most likely to have done so (89 per cent), with large buyout (79 per cent) and private credit (78 per cent) second and third, respectively. Venture capital (52 per cent) and real estate (57 per cent) are the least likely (Figure 1).

There is also considerable divergence according to geography. Whilst the majority of North American GPs (57 per cent) have avoided an investment on ESG grounds, this is lower than the UK (63 per cent) and Continental Europe (67 per cent).

When asked what has the greatest influence on their attitudes and activities related to ESG and sustainability, the majority of GPs (51 per cent) cited their firm’s core values, with influence from investors (43 per cent) second. Other factors, including peers and regulators, were negligible in comparison.

However, as above, these attitudes differ within the industry, with geography being the main variable.

North American GPs are the most likely (60 per cent) to cite their firm’s ‘core values’ as the greatest influence on their policies towards ESG and sustainability, compared to 53 per cent in the UK and 36 per cent in Europe. Conversely, North Americans are far less likely to attribute their ESG position to investors: just 32 per cent described investors as their greatest influence, compared to 46 per cent in UK and 57 per cent in Europe.

Jonathan Harvey, Head of Relationship Management, Fund Solutions, at Investec, says: “We’ve certainly seen GPs’ focus on ESG accelerate in the past 12 months, and this is something we’ve been helping to support with our own products, too. As an example, we recently structured a pioneering ESG-linked NAV product for a GP to support the expansion of its portfolio, which was the first of its kind in Europe.

“Our aim is to continue to innovate with our offering to help our clients stay true to their values and those of their stakeholders, while still making the most of the opportunities in the market.”