Some private equity firms have integrated environmental, social and governance considerations into their standard process, while many others have yet to do so, according to a new PitchBook survey.
The survey, conducted from January to April, comprised 48 firms globally, including 33 in North America, 11 in Europe, three in Asia/Pacific and one in Africa.
PitchBook said the data in the new study came mainly from smaller firms — 23 reported assets of less than $500 million, while eight had assets of more than $5 billion — and so should be considered as representative of smaller outfits rather than of the overall market.
The report found that unlike in earlier studies when the influence of limited partners drove ESG efforts at private equity firms, risk management surged as the main driver in the new survey. Only 40% of respondents said LPs had expressed increased concern about ESG in the previous three years.
Researchers explained that LPs had not stepped back from encouraging ESG considerations. Rather, given the predominance of smaller firms in this year’s respondent class, LPs were family offices and high-net-worth individuals, not large institutions, and these may not be urging ESG consideration as much as institutional investors would.
At smaller firms, managing general risks take on much more importance.
Cost was a major challenge confronting ESG promoters in the new survey, named by 28% of respondents, compared with only 4% in 2014.
The report said this coincided with the number of small firms in the survey; the smaller the firm, the harder it is to put resources into ESG issues.
As a result, the number of firms that said they outlined their ESG philosophy in LP agreements had increased significantly as a way to manage LP expectations from the outset.