News & Analysis

Investors: worry about reputation, less so environment

 New research shows governance and social issues far outrank environmental risks in the minds of LPs; and GPs do not fully understand what problems really matter to their investors.

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Private equity investors care more about reputational risk and the governance and social aspects of ESG than about environmental issues, according to IAG’s recently published Reputational Risk in Private Equity (RRiPE) Index.

The 102 LPs surveyed ranked 24 different investment risks/issues on a scale from 1 to 10. The results show that bribery; concealing bad news from investors; providing unsafe work conditions; charging hidden fees; and avoiding tax at operational locations are the top five risks impacting LPs investment decisions. Although environmental matters are often commonly associated with ESG, not one environmental issue made it into the top 10-ranked risks.

Moreover, LPs are more likely to require their GPs to implement reputational risk policies than they are to require them to sign the UN Principles for Responsible Investment (PRI), according to the RRiPE Index. Of the LPs surveyed, 70 percent require or prefer that their GPs be PRI signatories, while 89 percent require or prefer that GPs have clear, documented procedures in place to protect their LPs’ reputations.

“[Environmental issues have very little impact […] unless they were widely reported in the press; LPs hate ‘Wall Street Journal risk,’” said one placement agent in response the survey, referring to negative news stories about portfolio companies that might, by association, sully LPs’ reputations.

The RRiPE Index also revealed that LP/GP perspectives on investment risks might not necessarily align. In parallel to the main LP survey, 100 GPs answered questions assessing LP attitudes on reputation risk and ESG. The biggest disparity in the responses showed that GPs currently “severely underestimate” the significance of tax avoidance in LP decision-making: while the LPs rated the issue at an 8.5, GPs rated it at a 5.9.

There were also several risks that LPs do not consider as significant as GPs think. LPs care less about the environment (with the exception of fracking); the elderly and vulnerable; and forced resettlement than GPs think. Also, investing in “vice” industries like arms, gambling, alcohol and tobacco were not considered as much of a problem by LPs as GPs predicted.