LGT Capital Partners reports that European alternatives managers’ adoption of ESG principals has increased.
The sixth annual ESG Report assessed some 294 managers globally, grading them on how successfully they have integrated environmental, social and governance (ESG) considerations into their investment activities.
The report found that the majority, at 58 per cent, of private equity firms are rated as either ‘Excellent’ or ‘Good’ in terms of ESG integration, compared to just 27 per cent in 2014, indicating that this has been made a priority by private equity managers.
Europe continues to lead the way in ESG integration, particularly in private equity where 75 per cent of managers were ranked as ‘Excellent’ or ‘Good’, LGT says. And, while still some way behind, the US has shown improvement in the last year with the number of private equity managers ranked at least ‘Fair’ for ESG integration increasing by 5 per cent.
Mega and large private equity managers continue to show the most strength in terms of ESG, with 86 per cent of mega and 58 per cent of large managers ranking as ‘Excellent’ or ‘Good’. However, size should not be considered a barrier to ESG integration, with 52 per cent of small managers also ranking as ‘Excellent’ or ‘Good’, the report finds.
In the hedge fund space, 82 per cent of managers are now ranked as ‘Fair’ or above with respect to ESG integration, a significant improvement on the 54 per cent recorded in LGT’s 2014 report. Europe again leads the way, with 23 per cent of managers ranked as ‘Good’ and none of those surveyed ranked ‘Poor’; however, hedge funds in the US and Asia continue to lag behind significantly having only taken basic steps towards ESG integration.
LGT Capital Partners’ analysis is based on assessment of managers across four key criteria: commitment to ESG through the development of specific policies or adherence to broader industry standards (such as UN PRI); the extent to which ESG is formally integrated into investment processes; ownership philosophy and the extent to which managers are active in defining the ESG practices of investee companies; and their reporting on ESG (at both portfolio company and aggregate fund levels). Managers are then assigned an overall rating on a scale of one to four, where one indicates ESG excellence and four indicates little or no institutionalised commitments to ESG practices.
Commenting on the ESG Report 2018 findings, Tycho Sneyers, Managing Partner at LGT Capital Partners and board member at UN PRI says: “ESG has become an highly important issue for investors in recent years, with many institutional asset owners placing it at the heart of their investment activities, forcing their managers to do likewise. Our findings show that alternatives managers are responding to these requirements, particularly in private equity where the majority of providers now rank highly for their approach to ESG. This is not the end of the story however; further work is needed. Managers will have to continue to develop and enhance their approaches to ESG in order to meet the needs of investors.”