Barriers to use of ESG for private equity

– So far, few private equity funds are signatories to the Principles for Responsible Investment.
– GPs are worried about greenwashing criticism, costs and managing ESG data.

How do you integrate ESG into private equity? In this piece, SASB’s Jeff Cohen, Head of Private Investments Initiatives, explains how a new mindset can help clarify where and how to get started. So far, very few private equity funds are signatories to the Principles for Responsible Investment. Here’s an excerpt from Jeff’s commentary that might explain why that is:

A by-product of highly variable approaches to ESG integration is that many (46 percent) of GPs are concerned that by using their own ESG scoring methodologies they may leave themselves open to accusations of greenwashing. Additionally, other obstacles include perceived difficulties with cost and resource constraints, as well as managing multiple sources of ESG data.

I’ll add another challenge both guiding the industry and inhibiting further adoption: the highly complex, interconnected, and dynamically shifting ESG ecosystem. Those not fully dedicated to understanding this ecosystem and its practical benefits and implications throughout the investment process and other fund-management functions will likely find it difficult to make meaningful progress.

In his conclusion, Jeff notes that turning ESG from a cost-center to a value-driver takes conviction, as noted in this excerpt:

Whether ESG is primarily outsourced or built internally by a GP, successful integration is marked by teams of investment, legal, risk, and investor relations professionals integrating ESG into their current responsibilities. When a largely outsourced model is coupled with a committee of existing staff who add ESG as a token secondary or tertiary responsibility—without in-house expertise, it’s little wonder that ESG integration seems burdensome.