GPs straddle a continental divide on ESG

Private equity firms with ESG-driven investment funds are struggling to straddle the gap between the United States’ growingly anti-ESG stance and the sustainable investment goals of much of the rest of the world, attendees at PEI’s Responsible Investment Forum in New York heard.

“We consistently prepare ESG reporting and we have different clients across the globe, and some clients do not want to receive that information about that particular facet of the strategy,” said Janay Anderson, VP of Operation Due Diligence at Aksia, during a panel on Wednesday.

The dynamic is forcing GPs with ESG-focused investments to become more creative in their positioning of those investments, and their thinking about future ones.

Some GPs are now leaning more into investments that fall outside the traditional definition of ESG, but that are what might be called sustainability adjacent.

“Clients are already starting to lean more into investments that have historically not been favorable from a sustainability perspective,” said Ryan Malloy, a sustainability investment research analyst at Fiduciary Trust International.

Middle ground?

“Utilities, for instance, historically have been the primary contributor to energy use emissions and CO2 emissions in our economy. But at the same time, they are leading the charge on increasing renewable power generation and are actively spending on grid resilience. We think it’s important to take a nuanced approach, and maybe not focus on strict negative screening.”

Karin Bouwmeester, the ESG lead for private equity at the Dutch LP PGGM Investments, says the asset manager views ESG as a spectrum, with investments that help to mitigate the negative effects of pollution and climate change on one end, and those with impact-oriented sustainability goals at the other.

“I think the interesting part is in the middle, and that is also where we are trying to steer towards, and this is what we call ‘improvers’. These are companies that are not yet an impact investment yet or another EU taxonomy, such as a light investment or sustainable investment, but we see opportunities for them to move.”

Many of these “improvers” include GPs that are aligned with sustainable development goals, investing in science-based or socially beneficial industries such as healthcare or life sciences.

“I think we already see it among our GPs, that some of them are taking a really more deliberate approach to SDGs,” added Bouwmeester.

Despite the changing sentiment in Washington, there is still a belief that ESG investing is not going away any time soon, and the LPs who are still committed to sustainable investing will have avenues to do so.

“If you had an ESG process or a responsible investment process, then that shouldn’t stop,” noted Anderson. For others, she said: “This is just marketing at the end of the day. If changing your marketing changes how your process works, maybe there wasn’t as much substance there initially.”

ESG investing has been controversial almost from the beginning, at least in the US, with real backlash by the conservative-leaning state governments of Texas and Florida kicking off in 2022, with other red states following since. Together, those states bar LPs managing more than $1 trillion from making explicitly ESG-related investments.

The Trump administration’s anti-ESG messaging, coupled with its planned increase fossil fuel investment, has reinforced existing resistance towards sustainable investment.

In the EU and parts of Asia, LPs are subject to sustainability regulations, putting some GPs and advisers in the position of having to tailor their pitches to two markedly different investment strategies.