Navigating ESG frameworks has become front-of-mind for private equity investors as their clients place increasing importance on sustainability.
A Bain & Co. report on Asia-Pacific private equity published in March said that half of the general partners surveyed planned to significantly increase their efforts and focus on ESG in the next three to five years, up from 30% three years ago. A separate Bain & Co. study published last year found that 93% of global limited partners would walk away from an investment opportunity if it posed an ESG concern.
"I think it's fair to say there are a lot of regulations. And I'm afraid more will come. … Luckily for private equity, our companies are subject to slightly fewer regulations than listed companies, so we have some room to figure out what are the ones that are really important for you that you really need to apply," said Tang Zongzhong, head of sustainability at BPEA EQT, which has over $22 billion in assets under management.
Still, within the industry, there is hope that regulators across the world will work together to come up with more standardized frameworks, he added.
Asian regulators and private equity industry players tend to look toward European frameworks to shape their ESG approach, and the process of developing them is still ongoing, said Chik Wai Chiew, chief executive officer and executive director at Heritas Capital, which has over $250 million in AUM.
"These regulatory evolutions are not on a straight line … I do think at some point in time, there might be a realization that maybe there's a bit of overshooting, maybe a bit of pullback and things like that," Chik said.
"Because ultimately, the reality of the industry is that it is very ecosystem-linked, it's not that the regulator can say and do whatever they want and expect compliance. There is a bit of iteration, interaction and pushback," he said.
Chik added that investors can also push portfolio companies to go beyond regulatory requirements. For instance, a dental group of which Heritas Capital is the second largest shareholder made its 100th outlet a free clinic for the underprivileged.
"This is not a regulatory requirement. We did it because we believe that this is what we could do to give back… Does it affect our returns? Of course, because you still need your doctors to volunteer and (provide) resources for that clinic, but we felt that that was the right thing to do," he said.
The panelists also agreed that greenwashing is a real risk that can be mitigated by being genuine and purposeful, and that the drive often has to come from the top.
"One of the things we always say to our portfolio companies is that you have to treat this as rigorously as any of your other operational goals," Tang said. "Have a plan, think through how you (plan to) reduce your first 20% of your emissions … (Next, consider) the next 20%, and then have a board or management-level discussion."
"They might say that's too ambitious, we might want to do that a little bit later and that's fine, instead of saying 'Oh we're gonna go for an IPO? Let's dress it up a little bit.' That, I think, is where a lot of the issues come from, and this kind of demand has to come from investors and many other shareholders," he said.
"It has to come from the board level of the company itself, not just the head of sustainability, and it has to come from the private equity firm, the investors," agreed Ivo Philipps, founding partner and chief operating officer of Affirma Capital, a subsidiary of Standard Chartered Private Equity, with $3.5 billion in AUM.
"There has to be belief through the chain of having the targets to zero or whatever (your target is). And there has to be a believable step change," Philipps said.