In EY’s Global Private Equity Survey 2021 there was a mix of real and professed action, but more telling than any of the results was the fact that it was the first time a survey often looked to as an industry benchmark had asked about ESG.
In comparison with their public market cousins, private equity firms are coming to ESG late. Listed sustainability funds are nothing new and many corporates have had ESG processes and teams in place for years. Private equity, on the other hand, is really only beginning to get to grips with how to measure, monitor and integrate ESG.
Some protest that private equity has been attuned to ESG through the UN Principles for Responsible Investment, but UNPRI has its limits as a marker of industry performance. As one communications head at a European buyout fund puts it: “For a number of years we had to do practically nothing as part of our UNPRI membership.”
For too long, copy and paste was an ESG strategy. “We see funds regurgitate the six PRI principles on their website, but they have no ESG person, no strategy beyond that. “You can draft it in 30 minutes,” says the ESG head for a European LP.
Private equity firms used UNPRI membership as a way to tick the ESG box, and most LPs were happy enough with that. But this has changed. While the PRI is now “putting GPs under a lot more pressure and this year the requirements are even tougher” according to the comms head, most firms say the more significant pressure is coming from LPs. “LPs are really forcing GPs into actions,” says Ellen de Kreij who implements the sustainability programme at Apax. “You can’t get away with not communicating.”
This pressure is prompting GPs to look beyond the usual dealmaking talent to a new type of talent: the specialist ESG recruit. “There has been a marked increase over the last three years in the number of private capital firms considering an ESG hire,” says Kate Goodall at specialist headhunting firm Private Equity Recruitment. “Firms will talk openly about the pressure they are feeling from LPs. It’s not enough any more to be a UNPRI signatory. You have to demonstrate how you are embedding this into your business and investment strategy.” Goodall says a “big positive change” has been the perception of how ESG fits into the business. “It is no longer just a risk management exercise, it’s a potential financial return exercise.”
“LPs are really forcing GPs into actions. You can’t get away with no communicating”
Ellen de Kreij, Apax
A primary issue for firms looking to staff up is the relative lack of ESG talent with private markets experience. A senior executive at a big buyout house currently in the process of hiring an ESG lead says “the challenge with a brief like this is that you’re going into the market looking for experience in a sector that’s relatively new and anyone with really long experience sits within a corporate.”
This is leading many to tap the consultancy world for talent. “It is a relatively small pool with that senior level of experience (which is why) we’re seeing a lot of success bringing people from consulting firms,” says Hannah Wylie at Sillman Thomas, a specialist ESG and impact executive search firm.
A further challenge is sorting the signal from the noise in a world where more people than ever are eager to flash their green, responsible credentials. “There has been an explosion of role types and specialisms so it’s hard to navigate from someone’s LinkedIn profile to determine what their particular role and expertise is,” says Helen Pradas-Page at specialist ESG recruiter Acre Resources. “If you’re not familiar with the talent pool everyone can look like an ESG specialist.”
Moving away from applying ESG solely to manage risk and instead using it to drive value also requires a particular skill set. “What we need is someone who can implement change,” says the buyout firm exec. “Although we’ve looked at reasonably good candidates who can do good risk analysis, we’re not confident they’re necessarily able to plug into portfolio companies at that senior level.”
This shift to viewing ESG as part of the value creation process is in turn changing the profile of the ESG function within firms.
“In the past ESG was removed from the action, at a mid-manager level and viewed through a risk lens,” says Wylie. “Now this person creates and implements strategy and is focused on value creation and that’s reflected in who we’re hiring – exceptional agile relationship builders, with the ability to work across the piece, from portfolio companies through to management teams, IR and general counsel.”
Being able to work across the firm raises another question: where exactly should they sit? “Firms are asking where do we anchor this role?” says Goodall. “IR is a natural place to anchor it, close to LPs. Or do you anchor it to the investment team, or the portfolio management team? Where it hasn’t been as effective is when this role sits entirely by itself, because it requires this individual to build relationships with the investment team, LPs, the portfolio management team.”
“If you’re not familiar with the talent pool everyone can look like an ESG specialist.”
Helen Pradas-Page, Acre Resources
“It’s incredibly important that ESG doesn’t come to sit in its own silo,” agrees de Kreij. “Ultimately the responsibilities lie across operations, deal teams, IR – as soon as (ESG) sits somewhere separately it’s harder to make those improvements. When it comes to ESG talent, the key is to be able to understand the deal environment and the investment environment,” says de Kreij.
Yet for all the talk about the new-found importance of ESG to the industry, there can still be a tendency not to give the ESG role the prominence it needs. “We have had an ESG function and dedicated specialists since our earliest days, which I think is unique. (But there are) private equity houses where people are double-hatting, where they are responsible for ESG and something else,” says Shami Nissan, who leads responsible investment and impact at Actis.
The buyout exec in the process of recruitment says they are very conscious of ensuring the hire is a “strategic pin” in the group, reporting into a partner who is head of the portfolio team. “[But] with other GPs we get the sense that with some they aren’t reporting into such a senior level because the GP may not have done that strategic level thinking. Anecdotally we’ve heard other roles in this space are seen more as admin or compliance.”
“If a firm is hiring someone just to collect and process data, where is the job satisfaction?” says Goodall. “How attractive is that going to be to people? Because the talent pool is quite small, if you’re going to attract someone who is looking at five or six different opportunities you have to make it marketable, make it attractive.”
“Where it hasn’t been as effective is when this role sits entirely by itself, because it requires this individual to build relationships with the investment team, LPs, the portfolio management team.”
Kate Goodall, Private Equity Recruitment
Goodall believes attractiveness means seniority. “We always encourage the first hire in to be a senior person with a senior title, and you have to remunerate that person in a similar way to the team they are anchored to. It needs to be important and integral to the business. You can’t go in cheap.”
So what can this person expect to earn? Goodall won’t be drawn, but another specialist headhunter says the base salary needs to be “in the ballpark of £100,000.” And what about carry, that all-important remuneration element in private equity? Goodall says they are not seeing a carry element to the role yet, “we’re seeing salary plus bonus, but the bonus is important in part because you’re looking at changemakers.”
While Goodall says it’s also important for this person to have access to the investment committee, Sillman believes firms should be looking beyond that. “It’s not just about having access to the investment committee, it’s about sitting on the investment committee. As the last gate for ESG this is where the ESG lead can be most effective, and that’s the shift that we’re seeing now.”
The one thing all those spoken to for this piece agreed was that the most important factor in having a real impact, perhaps unsurprisingly, is enabling people to have a real impact. “What’s very important to candidates now is that they are given the platform to move the needle, to take the firm forward in their engagement with the portfolio companies to show demonstrable progress to their ESG commitments,” says Wylie. “Universally, the common theme when I talk to candidates about ESG is that they want to make a difference,” agrees Goodall.
As for that EY survey, 34 percent of GPs with assets above $15bn said they had a head of ESG, down to only 12 percent for houses managing $2.5 billion-$15 billion. A significant bump up in these numbers is an essential step for the industry.