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ESG Commitment
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Alternatives managers continue to show improvements in ESG integration

The seventh edition of LGT Capital Partners annual ESG report assesses some 304 managers globally, grading them on how successfully they have integrated environmental, social and governance (ESG) considerations into their investment activities. Beyond assessing managers, this year’s study also presented KPIs on companies in the firm’s co-investment and private debt portfolios.

Private equity manager: Continued ESG progress globally

Private equity managers have improved significantly over the last five years
  • Proportion of managers rated 1 or 2 has increased to 58%, up from 27% in 2014
  • Proportion of managers rated 4 has decreased to 17%, down from 43% in 2014

How the regions compare

Europe is still the clear leader on ESG integration in private equity, followed by Asia and the US
  • 30% of US private equity managers still largely ignore ESG, but this is a smaller percentage than last year
  • Half of Asian private equity managers are rated excellent or good on ESG integration

A look at the Asian private equity managers

Private equity managers in Asia: We have seen improvement, but a large number of new managers represent an oportunity for engagement
  • Large influx of new managers to the portfolio since last year, largely because of secondary transactions
  • New managers represent an opportunity for engagement
  • Managers rated 1 or 2 still account for 50% of the portfolio, with virtually no change on a like-for-like basis

A look at US private equity managers

Private equity managers in the US: Still lagging behind, but we observe more interest in the topic of ESG
  • Proportion of managers rated 1 or 2 remains largely unchanged, but we observe a five percentage point drop in the share of managers rated 4
  • First steps on ESG are important because they typically point to continued progress in the future

Private equity: ESG practices in Europe

Private equity: Strong ESG practices have become the norm in Europe, with 75% of managers rated 1 or 2
  • The proportion of managers rated 2 rose to 42%, an increase of eight percentage points since last year
  • Improving from a 3 to 2 is a critical jump in ESG practices, from an ad-hoc to systematic approach

Size of funds not decisive for ESG integration in private equity

Small size is not a barrier to ESG uptake in private equity
  • Larger managers continue to lead on ESG, with very significant majorities of large and mega managers having ratings of 1 or 2
  • 52% of small managers are rated 1 or 2, a larger percentage than in the middle market

Strong level of ESG commitment in private equity across the four themes

Private equity managers improve on rescource intense themes
  • Proportion of managers rated 1 or 2 is very similar for commitment and investment process, suggesting that a commitment leads quickly to changes in the investment process – it's not just "window dressing"
  • Smaller proportions of managers receive top ratings for ownership and reporting because of resource requirements

Hegde fund manager ratings globally

Hedge fund managers ESG rating by number of managers
  • Proportion of managers rated 4 has decreased to 9%, down from 42% in 2013
  • 82% of managers are rated 3, up from 54% in 2013
  • Managers rated 3 or better invest on our managed account platform, which allows for greater transparency and the exclusion of companies involved in controversial weapons

Hedge fund manager - less assets invested with managers rated four

Assets invested with hedge fund managers rated four are now 4%, compared with 32% in 2013
  • Assets invested with hedge fund managers rated four are now 4%, compared with 32% in 2013
  • 87% of AuM are now invested with managers rated 3, up from 64% in 2013
  • Assets invested with hedge fund managers rated four are now 4%, compared with 32% in 2013

Hedge fund managers: ESG ratings by geography

Hedge funds managers in Europe are ahead on ESG
  • Similar to private equity, HF managers in Europe are well ahead on ESG, followed by Asia, with the US lagging behind
  • 23% of managers in Europe have good ESG practices, and none of them ignore the topic altogether
  • Most of the managers in the US and Asia (89% and 67% respectively) have taken only basic steps in integrating ESG

ESG Report – scope and methodology

LGT Capital Partners has been publishing its ESG Report annually since 2013. The ESG Report forms part of the firm’s larger ESG due diligence, monitoring and manager engagement process. The assessment serves a two-fold purpose. First, it shows our investors the extent to which managers are considering ESG factors in their investment, ownership and reporting practices. Second, it facilitates our engagement with managers on ESG, highlighting excellence in implementation and flagging areas for improvement. LGT Capital Partners’ 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.

"High expectations for SDGs"

“We are encouraged to see progress on ESG in Europe, the US and Asia, albeit from very different starting points. One theme that clearly stands out this year is the growing importance of the SDGs. Investors are increasingly turning to the SDGs to make their sustainable investment activities more outcome orientated, and they have high expectations for the goals.”

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