PE's approach to ESG evolving, but could be mandatory in future

Private equity investors are paying increasing attention to environmental, social and governance factors and in response many firms are implementing strategies to ensure portfolio companies are screened against ESG factors. This focus is likely to intensify and could even become a requirement for a fund over time, representatives from some of the world's most prominent private equity firms say in the latest episode of ESG Insider, an S&P Global podcast.

At The Blackstone Group Inc., the world's largest alternative investment firm, the ESG strategy is focused on making low-cost and no-cost operational improvements in its portfolio companies — in particular looking for ways to reduce energy and water consumption, and improve efficiency and reduce costs through the operation and maintenance of equipment.

"An example of this work [is] we can look at our investment in the Cosmopolitan hotel in Las Vegas, where we really went in there and helped with energy and water consumption reduction programs, implementing LED lighting throughout the hotel, increasing their recycling rates and improving waste separation efforts just to boost that," Blackstone Global Head of ESG Alison Fenton-Willock tells ESG Insider.

ESG considerations are nothing new for many private equity firms, but the industry's approach is evolving.

KKR & Co. Inc., another big alternative asset manager, launched a program over a decade ago focused on supply chain through the lens of issues like worker wellness, transparency and anti-corruption.

Over the next 10 years, ESG methodology will be an "absolute requirement" for every general partner, or GP, according to Hamilton Lane Inc. managing director Ana Lei Ortiz. The alternative investment management firm, which invests in private equity funds on behalf of its limited partners, or LPs, performs ESG due diligence on the firms it backs and monitors for adherence with ESG standards across a fund's lifecycle.

"[In 10 years GPs] will have to have very clear policies, they'll have to disclose a whole lot of information," Lei Ortiz says. "They won't be able to raise a fund if they're not able to address these basic questions."

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(Photo: AP)