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Private equity investors increase ESG focus, led by climate concerns

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A survey from LGT Capital Partners says that there has been a sharp rise in the proportion of private equity managers addressing climate change in their ESG policies.

  • Survey shows private equity investors increasingly worried by climate concerns.
  • Climate risk is driving most engagement, but improvements are being made in terms of diversity and inclusion (D&I) as well.
  • Private equity is increasingly engaging with ESG concerns and expectations, despite no mandatory framework or criteria to fulfil.

In its tenth annual ESG Report, LGT Capital Partners found that almost half (47%) of private equity managers are now addressing climate change through their ESG policies, an increase of 13 percentage points over the last year.

The proposition of managers assessing climate risks has also risen notably (from 32% in 2021 to 43% in 2022), while there has also been strong growth in the number of managers monitoring greenhouse gas emissions (40%, compared to 28% in 2021).

The results of LGT Capital Partners’ ESG Report 2022 reflect the significant progress that has been made over the last ten years, when only 28% of private equity managers assessed in the firm’s first ever ESG Report in 2013 were ranked as ‘excellent’ or ‘good’ with respect to their approaches on ESG

Europe is leading the way on private equity integration of ESG concerns

Europe continues to lead the way in ESG integration, with 84% of private equity managers assessed ranked ‘excellent’ or ‘good’ for their approaches, compared to 70% in Asia and 50% of US managers.

Over the last five years, however, Asia has shown the strongest improvement in ESG integration with an increase of 20 percentage points in the number of managers ranked ‘excellent’ or ‘good’.

50% of European private equity managers have implemented an approach to climate change, as have 40% of managers in Asia. The US remains someway behind on climate change issues, with just 33% of those assessed having an approach in place.

Of the managers that have implemented the EU Sustainable Finance Disclosure Regulation (SFDR), 23% classified their latest funds as Article 8 and 7% as Article 9.

The introduction of the EU’s Sustainable Finance Framework is having a clear impact on capital alignment. According to the survey, when asked about future plans and new fund launches private equity managers indicated the number of SFDR Article 8 and SFDR Article 9 funds is expected to double in their next generation of funds.

Private equity also building focus on diversity and inclusion

The LGT Capital Partners study analysed the activities of 392 managers globally (including 303 private equity managers) to assess the improvements made in ESG practices.

In addition to progress being made on climate change, LGT Capital Partners also finds strong improvements being made by managers with respect to diversity and inclusion (D&I) issues.

A majority of private equity managers (60%) now have a D&I policy in place (an increase of 10 percentage points over the last twelve months), while 51% of managers now consider D&I within their investment decisions. However, work remains to be done as, for example, in private equity co-investments, on average only 9% of board seats are taken up by women.

Commenting on the survey findings, Tycho Sneyers, a Managing Partner at LGT Capital Partners and a Board Member at UN PRI, said: “Over the past twenty years, since we started analyzing ESG activities, we have seen clear and significant progress in how managers approach ESG issues.

“In particular, this is reflected in areas such as climate change, D&I, and the continued trend towards outcome-oriented approaches, where we see managers integrating ESG aspects into their activities.

“Looking forward, we strongly believe that ESG integration will continue to help address the long-term challenges people and planet are facing, and support investors to appropriately position their portfolios in the growing spectrum of ESG opportunities and risks.”

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