After the political theatrics end, ESG will still be part of private markets

Private equity firms place value on ESG, even outside the political limelight, and that suggests sustainable investing will live on.

Much has been written about the ESG backlash in the US. It rumbles on, but the impact remains limited.

In places, the anti-ESG sentiment has been transposed into laws that Bob Eccles, a visiting professor at University of Oxford’s Saïd Business School, described as “crazy”. This is presumably why only 24 percent of them have passed.

With a long background in sustainable finance, Eccles is able to speak on a broad range of topics, which he did at PEI Group’s London office this week. Eccles classes himself as a sustainability pragmatist and much of the discussion circled back to a need to move past the “political theatre”, to work across the political aisle, and have more reasoned discussions about the correct way forward on the climate crisis and other matters of sustainability. At both ends of the spectrum, opinions are too extreme to be productive, he said.

Eccles, however, is optimistic that beyond the 2024 US presidential race, the anti-ESG movement will run out of steam: “You can sort of feel it: the wind going out of the sails, because the economic logic behind it isn’t there.”

And even while the noise continues, asset managers are not letting it distract them from integrating sustainability into the way they invest and operate, said Eccles. “When you talk to these people in the big asset managers and you say, ‘how much time is this taking up?’, it’s not much.”

This would surely apply to private markets firms in particular. Eccles is the chair of KKR’s sustainability expert advisory council, a group the firm retains “to challenge them and bring up issues that maybe they haven’t thought about”. He has previously made statements about how private equity is particularly well positioned to drive sustainability changes within their portfolios, and he reiterated these in the “Town Hall” area of our London office: “This is another capability they [private equity firms] can bring; they can bring capital, but they can also help [companies] negotiate ESG because they are in the supply chains.”

He also raised a point that one doesn’t hear so much these days: that the relative lack of scrutiny in private markets – as compared to public markets – allows investors to go about their business out of the limelight. This facet has become particularly relevant amid the politicisation of ESG: “What’s interesting to me about private equity, and I see this at KKR, is they’re not really under any public pressure – the same way a listed companies are – that they’ve got to be ‘woke’ or not be ‘woke’.”

Private equity firms are therefore pursuing sustainability initiatives “of their own free will, because they think it’s going to be value generating,” Eccles said. “And they are not going to be imposing costs on these portfolio companies for which they don’t think there will be some kind of return on it.”

ESG as an integrated part of investment looks set to outlive this run of political theatre.