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Private Equity Continues To Deepen ESG Practices Whilst Hedge Funds Are Lacking

LGT Capital Partners' latest ESG report shows that private equity managers have made significant progress with regards to how they integrate ESG factors into their operations.

LGT analysed 251 private equity managers for this year's study and the number of private equity managers ranked ‘excellent’ or ‘good’ by the firm on their ESG integration has increased by 78% since 2015, with 81% of European managers now ranked in these categories. Asia show improvements, with 63% of managers now ranked ‘excellent’ or ‘good’, while the US (43%) continues to lag.

81% of private equity managers analysed by LGT CP integrate ESG into their investment process, with 74% monitoring ESG competence and awareness at a portfolio company level. 42% of its private equity managers incorporate diversity and inclusion (D&I) into their investment decision-making, while 23% have a framework in place for addressing climate change. Furthermore, the report shows that 47% of LGT CP’s private debt portfolio companies assess their carbon emissions, which represents a five-fold increase since 2016.

Private equity manager's hedge fund cousins fared less well, however. Only 17% of hedge fund managers scored 'excellent' or 'good'. LGT's assessment of hedge funds (and long-only funds) now includes a bottom-up assessment of the listed assets they trade, which means that some managers were downgraded this year. Still, the number suggests that ESG integration in hedge funds is still in the very early stages.

Tycho Sneyers, Managing Partner at LGT CP and board member at the Principles for Responsible Investment (PRI) said:

“In the report, we show how ESG integration can be customized to various asset classes and investment styles. This makes ESG assessments more accurate and lays the groundwork for more effective engagement. A good example of this is the way we validate our top-down assessments of hedge fund managers with a bottom-up evaluation of the securities in their portfolios. And even in an asset class like ILS, which does not easily lend itself to ESG analysis, we show how to implement active ESG engagement. Overall, we see a significant amount of progress in ESG integration across asset classes and we expect such progress to continue. Moreover, we are convinced that ESG considerations are now more important than ever due to the significant environmental and social consequences from the COVID-19 pandemic.”

LGT has been publishing its ESG scorecard since 2013. Their analysis is based on assessment of managers across four key criteria: commitment to ESG through the development of specific policies or adherence to broader industry standards (such as UN PRI); the extent to which ESG is formally integrated into investment processes; ownership philosophy and the extent to which managers are active in defining the ESG practices of investee companies; and their reporting on ESG (at both portfolio company and aggregate fund levels). Managers are then assigned an overall rating on a scale of one to four, where one indicates ESG excellence and four indicates little or no institutionalized commitments to ESG practices.

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