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GPs establish their ESG narrative

Institutional investors are leaving fund managers with little choice but to develop a POV around sustainability, writes Ken MacFadyen (pictured), Senior Vice President, Head of Content Development, BackBay Communications.

If 2020 was a transformative year in private equity, 2021 is when GPs will look to adapt to rapidly evolving LP demands. Over the past 12 months, for instance, sponsors have had to reimagine traditional IR activities through a digital lens. While many will continue to leverage these tools long after the pandemic becomes a bad memory, other tectonic shifts across PE have the potential to leave an even more indelible mark. 

Most notably, an intensifying focus on ESG from limited partners is forcing many to rethink the role of sustainability, both, in their investment strategy and how they report non-financial metrics to key stakeholders. And as pensions, endowments, and foundations continue to embed an ESG lens into their core investment framework, GPs unable to convey their own “sustainability story” will encounter an increasingly higher bar to attract institutional funding.

Many LPs, themselves, are under intense pressure. Divestment campaigns focused on climate change, for instance, have become more common and effective. In Europe, the “Unfriend Coal” campaign is targeting insurance companies with investments in fossil fuels, while public pensions in the US, from New York City to Los Angeles, are facing similar calls to go green.

Social factors are also in focus, particularly after the BLM and “MeToo” movements spurred critical self-reflection among employers and investors. LPs, in turn, are scrutinising the extent to which fund managers embrace diversity within their own firms. And this is already beginning to influence recruitment strategies. According to EY’s 2021 CFO survey, over 50 per cent of respondents cited increasing gender and ethnic-minority representation as their top priorities, while over 70 per cent identified plans to establish diversity and inclusion programs.

LPs, of course, have always scrutinised governance. In a Covid world, business continuity and cybersecurity have stood out among the focus areas. But following high-profile scandals at Wirecard, Uber, and WeWork in recent years, LPs are even more intent to ensure alignment between themselves, their fund managers, and other previously overlooked stakeholders – from portfolio company employees to local communities. 

So, against this backdrop, many sponsors are realising that attention around sustainability isn’t going away.

To be sure, a growing number of PE firms in recent years have become signatories of the UN’s PRI. But the pressure is ramping up to turn this commitment into action. 

Across our client base, we’re seeing this from institutional investors who have already incorporated ESG factors into their core investment framework to fund managers producing inaugural ESG reports to document traction against non-financial KPIs. Some private equity firms are helping their portfolio companies initiate their own CSR journeys, while fintech companies are introducing new tools to standardise data and facilitate ESG reporting.

Five years ago, these themes were confined to specialist managers who focused exclusively on impact. Today, sustainability has become universal and can be expected to become a core part of investor relations for the foreseeable future. 

Ken MacFadyen, Senior Vice President, Head of Content Development
Ken MacFadyen works across BackBay’s private equity, asset management and fintech verticals, overseeing content development. Bringing approximately 20 years of experience in journalism, investor relations, and as an executive speechwriter

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