Sustainability, ESG and impact investment are increasingly prominent elements of the private markets fundraising narrative. But what is it that investors really want to see and hear, and what will put them off?
Affiliate title New Private Markets asked that question of representatives of AP4, the California Public Employees’ Retirement System, the European Investment Fund, IH International Advisors, StepStone Group and Railpen. Here are their seven insights:
1. Don’t cherry pick data
We are now entering the era of comparable and comprehensive ESG data. One or two good news stories from portfolio companies will no longer suffice for some investors; they want to see consistent, systematic data. “One good ESG story or metric does not make someone an ESG champion,” said Julia Jaskólska, co-investments and ESG lead for CalPERS private equity team. “Equally one bad one would not make a manager non-investable.”
2. Back up words with systems
If you make claims about sustainability, be sure these are substantiated by systems. A GP should have “a robust ESG and impact measurement framework,” said Matthew Johns, a principal at IH International Advisors. “If there is an absence of that, you are at risk of over-claiming and at risk of greenwashing.”
3. Be honest about dealflow
With the proliferation of climate-focused fundraising in recent years, limited partners may be watchful for too much money chasing too few deals. “Everyone will claim the have a proprietary angle and they were the lead investor in a deal,” said Hanna Ideström, senior portfolio manager at AP4. “I think it would be more refreshing if they were more honest about the market dynamics. Markets are competitive.”
4. Know the difference between ESG and impact
Sustainable investing definitions can be slippery. Make sure you are on firm footing when discussing either impact or ESG. “We sometimes find GPs confuse the two or use those terms interchangeably,” said Bhavika Vyas, managing director at StepStone Group. “For us they are not interchangeable.”
5. Be open to discuss measurement and alignment
For some investors, a measurement framework or alignment mechanism on impact outcomes is mandatory. “Someone not willing to discuss measurement and reporting on an impact strategy, while putting forward a sustainability/impact strategy, is totally disqualifying,” said Cyril Gouiffès, head of social impact investments at the European Investment Fund. At least be willing to engage in the conversation and “meet half way,” he advised.
6. Be humble, even when oversubscribed
Some in-demand GPs develop a celebrity status that can lead them to be less cooperative and transparent with data, noted Chandra Gopinathan, senior investment manager at Railpen. A firm should not have an attitude that suggests: I don’t need to give you this; you are only $30 million. “That’s off-putting,” said Gopinathan.
7. Understand that ostentatious charity can backfire
Think twice about trying to burnish your ESG credentials with accounts of charitable giving. To AP4’s Ideström this is “just an indication of excess profitability, probably at the management fee level”. She adds, “Rather than taking future pensioners’ money, they should leave that money with us.”
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Toby Mitchenall is the senior editor for ESG and sustainability at PEI Media. He is responsible for New Private Markets, a dedicated intelligence source on impact investing, sustainability and ESG in private markets, and is based in PEI’s London office. He can be reached at firstname.lastname@example.org.