ESG Gaining Momentum in the US

Private Equity International

By Natasha Buckley

The third annual Responsible Investment Forum New York, a conference partnership between PEI and the Principles for Responsible Investment (PRI), saw record attendance this year; it was standing room only as it kicked off with a keynote by Kurt Summers, treasurer of the City of Chicago.

“Now, we’re making investments that we know deserve our capital,” Summers said, emphasising that City of Chicago has not sacrificed returns in its pursuit of a high ESG portfolio score. But, he said, “the investable universe has to get better”, asking private equity firms to set the standard for positive capital contribution. At the same time, he noted, pressure on ESG from larger US LPs is only going to increase – a theme repeated throughout the event.

The conference was attended by 30 LPs from 24 organisations, mostly from Canada and the US East Coast. The PRI counts over 50 LPs from North America that are signed up to its principles. More than 75 North American GPs and funds of funds are signed up to the PRI – far fewer in number than the upwards of 275 European PE managers. However, almost half signed up in the past three years and – due to the support of mega-firms KKR and TPG – have equal representation in terms of assets under management to their European counterparts.

New Mountain Capital, a recent signatory to the PRI, was represented by founder and chief executive Steve Klinsky, who highlighted the importance of reputation to long-term success. At New Mountain Capital, Klinsky has created a publicly available tracker of job creation, the “Social Dashboard”, to demonstrate the socially positive role that private equity can play in economic growth and creation of high-quality jobs.

The role of reputation was picked up again in the next morning’s keynote by Tracy Harris, partner and head of ESG at StepStone, and John Monsky, partner, general counsel and chair of the ESG committee at Oak Hill. Harris noted how StepStone sees the integration of ESG impacting firm culture and how she’s seen Oak Hill’s alignment of interest, succession planning and transparency validate the firm’s “gold standard” ESG programme. Of note to many GPs was StepStone’s approach to scoring managers based on ESG initiatives. Monsky followed with another important aspect of ESG integration that is often unnoticed: how the firm’s commitment to responsible investment is often a critical advantage in deal origination, particularly in an economic environment where management teams have the ability to choose from several potential investment partners.

‘Change management’

As the forum was focused on US private equity, there was some discussion on how the political agenda presents challenges to sustainable finance. Speakers agreed that federal leaders are taking a step back at a point when regulatory certainty is needed, but local authorities and business leaders are taking up action and are earning public trust. As Rick Davis, a partner at Pegasus Capital, pointed out, “PE is a change management business” – which means predicting and understanding factors of change and skilfully managing the transition.

In a panel on the emerging trend of impact investing funds in the US, KKR discussed its newly launched strategy. “We believe we have been making impactful investments,” said Elizabeth Seeger, the firm’s director of sustainable investing, explaining that the platform is a means of channelling dedicated capital to opportunities that intentionally derive most of their revenue from environmental or social impact solutions. She warned that there is still much to do on ESG integration across the private equity industry – and that investors are right to be sceptical about dedicated fund offerings if managers haven’t built up ESG credibility across their portfolio.

Colin Etnire from Carlyle agreed that ESG is a universal lens, and that there is a distinction between managers that align with impact and those that are managing towards impact – and investors need to know the difference if they are allocating to impact.

Indeed, while challenges may persist, LPs are only getting more discerning on ESG. The conference enjoyed the continued support of ILPA, which hosted an LP-only discussion on GP progress regarding ESG and presented ILPA’s initiatives to form cohesive LP approaches to responsible investment. Every year shows more and more progress on ESG in the US, and 2019 is no exception.

Natasha Buckley joined the PRI in 2011. She is responsible for the PRI’s work in private equity, through which the PRI acts as a global platform to understand and share good practice, develop reporting practices and establish LP-GP alignment on expectations around responsible investment.

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