Private equity investments are becoming increasingly attractive in light of low interest rates and high stock market valuations. But for investors, the level of sustainability in the industry is also important.
Until recently, sustainability had not necessarily been associated with private equity managers. According to Franziska Raff, Head Communication at LGT Capital Partners (LGT CP), however, that view is now outdated. LGT CP is a leading asset manager for alternative investments based in Pfaffikon, Schwyz, and its annual sustainability/ESG report supports Raff’s claim.
She says that private equity managers in particular have significant potential to promote sustainability and that most of them now have clear sustainability principles in place: «When they invest, they also systematically integrate ESG criteria, actively exercise shareholder and owner rights, and are increasingly informing their investors about these activities.»
Lack of Data
At present, 75 percent of the managers surveyed in Europe as part of the report have been assigned a rating of one or two by LGT CP. This means that they have implemented very good or excellent ESG processes.
However, in Raff’s view, there is still some catching up to do in this area: «The positive results of private equity managers in terms of sustainability could be even better if more data were available, like in the case of equities or bonds.»
Consistent Key Performance Indicators
The problem: private companies are obliged to publish fewer figures and to do so less frequently than listed companies. Furthermore, due to the illiquid structure of the investments, the figures are reported with a delay. Another factor is that private equity investors often invest in young companies that are in the development phase and do not have well-established reporting processes in place.
Independent sources
«It is therefore clear to us that in a next step, consistent key performance indicators must be developed,» explains Raff. However, the quantity and quality of data required to this end is still lacking. One solution to this is to draw on independent sources.
Hot Topics
For example, LGT CP works with the database RepRisk, which systematically searches 80,000 sources on the internet (news portals, reports by NGOs, studies) in 16 languages for ESG-related content. Based on this information, it then compiles 28 ESG key performance indicators and 45 so-called «hot topics», or ESG-related risks.
If a company is associated with one of these factors, RepRisk’s private equity managers are promptly informed thereof. They can then address the issue with the company in question, request further information and where appropriate, define measures to improve the situation.
Improving Through Dialogue
Raff sees the integration of RepRisk into ESG monitoring as having the added advantage that it offers a good basis for a concrete dialogue with these companies: «Because of our long-standing experience, we know that this dialogue and the commitment of investors are key factors in promoting the integration of ESG criteria.»
She is therefore convinced that sustainability will also firmly establish itself in the private equity industry: «Because of their long-term and direct relationships with companies, private equity managers in particular are predestined to promote positive change. The industry can therefore make an important contribution to further advancing sustainable investing.»
Franziska Raff studied history and psychology at Munich's Ludwig-Maximilian-Universität and at NUI Maynooth in Ireland. She joined LGT nine years ago after holding various positions at PR agencies, in radio and as a journalist in China. After a role in the communications department at LGT Group, she moved to LGT Capital Partners in 2012, where she is currently Head Communication. The avid basketball player’s communications activities cover a broad range of investment topics. Sustainable investing, which she has been increasingly focusing on for a number of years, is one such topic.
