Private equity’s ESG and sustainability teams will have a busy year ahead with new issues and priorities joining their business-as-usual activities. New Private Markets asked the heads of ESG and sustainability at several GPs to describe their priorities for 2023.
Carbon footprinting of portfolios is a priority for many firms, with some entering their second or third year of measurement. Several ESG heads are also looking for more sophisticated tools to integrate climate into their investment processes. Permira, for example, is exploring possibilities relating to carbon pricing and Arjun Infrastructure Partners will be taking the results of its physical risk scenario analyses and “challenging” its portfolio with the results.
Biodiversity on the bench
Despite progress in assessing nature-related impacts and risks in 2022, biodiversity is not a priority for many private equity ESG heads in our year-end series. Partners Group’s Mondino says the firm is focusing on its climate impact; Ares and Apollo are both planning to monitor biodiversity-related regulation and initiatives, but many firms noted biodiversity risks are not material for their portfolios. A notable exception is Schroders: sustainability director for private equity Amara Goeree says natural capital and biodiversity “have gained significant momentum across Schroders Capital’s private assets business”.
DEI in the portfolio
A number of ESG heads are looking at implementing diversity initiatives at the portfolio level. DEI in private equity has so far typically focused on the makeup of investment firms’ own staff, management and boards. But for a handful of firms, it is becoming a portfolio management issue. EQT’s Tang Zongzhong “sees potential to build stronger teams” by implementing diversity initiatives in companies, while Igneo’s Sophie Durham would “like to see more progress in [Igneo’s] portfolio” on diversity. The starting point is at the portfolio company board: Permira, for example, has set board gender diversity targets for one of its buyout funds, while Apollo’s chief sustainability officer Dave Stangis lists board diversity as one of several priorities “within Apollo and portfolio companies”. Another firm to watch in this space is Astorg: it set a 40 percent board diversity target for future deals from September 2022.
From planet to people
With these newer items joining longstanding priorities on the agenda, ESG professionals will have a busy year ahead. “There is no end of priorities and, in some cases, this can be detrimental to making sufficient progress in any one area,” says Arjun’s Keaney-Watkins. But fund managers may soon find new issues jostling for position as a recession unfolds. turbulence will throw up new social issues for fund managers to consider. Partners Group’s Mondino says: “As the macroeconomic backdrop becomes more challenging, we need to focus more on People and creating value in the long run.”