It’s too early for private debt firms to say it’s a job well done on ESG, but there are some promising signs. In our LP Perspectives 2023 study, we find 60 percent of investors saying their GPs are doing well at implementing planned ESG strategies and the same number describing the frequency and quality of ESG reporting as either good or excellent – compared with 40 percent a year ago.
When it comes to climate change, only 12 percent of LPs today feel their GPs are not taking the issue seriously enough – compared with 29 percent a year ago. Such things are clearly of growing importance to investors, with almost 30 percent saying they always consider UN sustainable development goals in their investment decisions and only 21 percent admitting they never do so.
But it’s far from a fait accompli. Among some US institutions in particular, anti-ESG sentiment has crept in amid claims that asset managers are ignoring their fiduciary duty if they place too much emphasis on environmentally and/or socially responsible strategies.
The argument that a link exists between good ESG governance and better returns is a forceful one, as made in this report from abrdn for example. But not everyone buys the argument, and some of the scepticism is reflected in our own study: the number of LPs not believing ESG is a driver of better long-term returns has increased from 26 percent to 31 percent over the last year.
But while the picture on ESG overall is largely encouraging, when it comes to diversity, equity and inclusion, it can only be described as bleak. Our study finds only 44 percent of LPs rating their GPs’ efforts as good or excellent in relation to portfolio companies and 47 percent at the GP level. Moreover – a startling number this one – just 1 percent consider themselves fully satisfied with their GPs’ diversity and inclusion efforts. A little better – but not much – is the 5 percent figure for LPs rating DE&I reporting efforts as top class.
On a school report, private debt’s ESG comments would be along the lines of “good, but could do better”. On DE&I, it would be hard to find the words to adequately convey how much more work needs to be done. We’ll be looking closely for signs of progress this time next year.
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