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Private markets managers increasing efforts to incorporate ESG — survey

The private markets industry is increasingly acknowledging the importance of investing with environmental, social and governance issues in mind, but the majority have difficulty translating these intentions into formal policy implementation, said the results of a survey conducted by Makena Capital Management.

Makena Capital surveyed 154 private market managers on incorporating ESG factors into their investment activities and found a few key trends.

One was that the managers with the most robust processes are in the highest risk areas, such as natural resources and private equity, where the possibility to invest in ESG-averse opportunities such as oil and gas, mining or gun manufacturers are the greatest risk areas. Another was that private markets managers are more likely to have established ESG practices than public managers — particularly in Europe, where 100% of Makena's private managers in its outsourcing business reported that they factor ESG criteria into their investment due diligence processes.

Finally, the survey results revealed a direct relationship between assets under management and the extent to which firms have dedicated resources for ESG practices. Often, larger firms are able to dedicate more resources to ESG due to their resources and long-term perspective. Meanwhile, a lot of smaller firms are run by younger leaders who see the inherent value of ESG, but don't necessarily have the resources, according to Makena.

Nearly two-thirds of respondents — 66% — already include ESG considerations in their due diligence processes.

“This shows the power of ESG in terms of its potential,” said Mark Brzezinski, managing director at Makena Capital who leads the firm's ESG efforts. “This is really a breakthrough moment. The positive implications that we hope come from this (ESG) approach will become more manifest.”

However, not all managers that use ESG have codified this process in a policy or firm statement. Forty-three percent of respondents have an ESG policy in place, with 3% saying they're in the process of establishing one.

That said, 81% said they do not have a dedicated ESG professional or professionals on staff.

Lara Banks, a managing director at Makena Capital responsible for portfolio management and manager selection for its natural resources portfolio, said that the company is using these survey results “to understand how our managers are approaching these issues today and to figure out what are the best practices.” Best practices include signing the United Nations-supported Principles for Responsible Investment, an international network of investors working together to put the six Principles for Responsible Investment into practice, as well as adopting customized goals and metrics. Ms. Banks added the managers surveyed “report on their current practices annually and have established key performance indicators by company.”

Ms. Banks also noted: “We realize this is not a one-size-fits-all process and it's one that all of our managers can implement properly,” given the proper guidance.

Makena Capital has more than $18 billion in assets under management.