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One in four LPs willing to trade lower performance for better ESG - survey

Greg Gille
@unquotenews
15 July 2021

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While higher performance is still the primary motivator for many investors, 27% of global LPs are willing to trade lower performance for excellent ESG credentials, according to a survey by placement agent Capstone Partners.

The proportion is higher for European LPs (29%), according to the survey by the placement agent, which recently polled 140 global investors.

A third (34%) of LP respondents expressed an opportunistic view on the trade-off between performance and ESG, and would choose either one depending on the investment case, Capstone highlighted – further adding pressure on GPs to better track performance in that area.

Capstone noted that LP dissatisfaction with ESG may be reflected in the secondary market, with ESG-focused LPs "motivated to divest positions in funds where they perceive ESG efforts to be lacking".

Another way in which LPs are increasingly making their voice heard is opt-out options for ESG reasons. The trend is gaining traction with LPs, particularly in Europe where 37% of respondents will ask for them, according to the survey.

Overall, European investors continue to lead the way on ESG, Capstone noted. This is particularly noticeable when it comes to metrics: nearly one in five (19%) European LPs currently look at specific ESG metrics, in contrast to just 4% in North America and 9% in Asia.

More LPs in Europe (64%) take a direct and hands-on approach with GPs to assess their ESG capability, while a smaller proportion of investors in North America (59%) and Asia Pacific (52%) are making their assessment through document review.

For European LPs, environmental concerns are most prominent, while social considerations are a higher priority for North American LPs, and Asian LPs tend to focus more on governance, Capstone said.

The placement agent is also expecting that discrete pools of capital for dedicated ESG investments in private equity will become more commonplace in all regions. It is still an early trend, it said, with just 15% of global LPs currently putting them in place. The trend is notably set to accelerate in Asia-Pacific, where almost half (44%) of respondents are expecting specific pools of capital to be created.