 By Bryan Joseph, Partner & Global Actuarial Leader, PwC
& Shami Nissan, Assistant Director, Sustainability & Climate Change, PwC
The insurance industry and pension funds are significant investors into private equity (PE), and along with other investors, insurers face increasing pressure from their own policyholders, regulators, shareholders and other stakeholders to invest responsibly.
PwC’s recent survey of the attitudes and responses of 17 PE houses to the responsible investment agenda reveals that while responsible investment activity in the PE sector is ramping up there is still far to go to meet the needs of investors. *For more information regarding how the survey was undertaken, please see section at the end of this article.
To effectively demonstrate that assets are being managed responsibly, insurance companies need to obtain considerable information regarding the responsible investment policies, procedures and performance of their investment managers. At this point, this information can be difficult to obtain from PE houses, many of which are still in the process of putting in place responsible investment policies and procedures, and are yet to report publicly at a comprehensive level. Indeed such reporting will be a requirement of Solvency II.
How is private equity responding to responsible investment?
The PwC survey - Responsible Investment: Creating value from environmental, social and governance issues - showed that the PE industry’s response to responsible investment is evolving rapidly but it is still work in progress.
While the majority of survey participants acknowledge the growing relevance of responsible investment to their business, and to their investors, they face challenges implementing robust policies and procedures to manage both the risks and opportunities this agenda presents.
We found two key drivers for activity - risk management and investor concern. Indeed for some PE houses questions from investors have been the key catalyst for adopting, or progressing, their responsible investment strategies. Pressure from investors looks set to remain a significant driver for activity: 88% of survey participants believe that limited partner attention to environmental, social and governance (ESG) issues will increase in the next 5 years.
While the majority of PE houses we surveyed believe that managing ESG issues can create value (for example through mitigating risks, realising cost savings or generating additional revenue through ‘green’ products and services) progress appears to be patchy. Every PE house we interviewed said that they consider ESG issues to some extent during investment appraisal however there is significant variation in the formality and the sophistication of the processes in place to do so.
The levels of public reporting and accountability are similarly varied. Only 50% of participants have a policy addressing responsible investment and 47% have limited or no public reporting covering their responsible investment strategy. Publishing a responsible investment policy in the public domain is an important first step as it sets out the investment ethos of the house and makes PE houses accountable for putting their plans into action. Publishing performance data allows stakeholders to measure progress made against these commitments. However, only 40% of the PE houses interviewed had put systems in place to collect data from portfolio companies to measure the value created by environmental and social activities.
Our discussions with PE houses suggest that there is a degree of nervousness amongst some with regards to reporting – there is limited understanding of what constitutes best practice and therefore cautiousness about making public responsible investment commitments. The survey also revealed that, in developing responsible investment policies, implementing procedures and collecting performance data, PE houses face particular challenges given their portfolios often span diverse geographies and sectors.
Looking ahead, all participants bar one believe that ESG issues will become more material to their business in the future and the vast majority (94%) said they will be increasing their focus on responsible investment activities in the next five years
So what does this mean for insurers?
Responsible investment is becoming core to a number of insurance companies and many insurers have responsible investment guidelines and face questions at annual meetings. The consequences of damage to reputation arising from investment outside the guidelines can be serious, in terms of loss of business (surrendered policies) or non-renewal of contracts. Documenting and reporting these responsible investment processes must therefore remain at the heart of the activities of PE houses as well as insurers, as one of their sponsors.
As our survey has shown, the PE sector is at the relatively early stages of defining a best practice approach to responsible investing and consequently documenting and reporting approaches and performance. Investors such as insurers, who have an interest in how the PE sector responds to the responsible investment agenda, can use this opportunity to engage and help define what constitutes best practice.
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