Liliya Kamalova from CalPERS talks to us about the pension fund’s ESG strategy specifically for private equity investments and how important it is for the future.
In terms of your private equity investment portfolio, how widely integrated is ESG assessment and monitoring into your investment decision-making? (Is ESG an essential requirement of your manager/fund selection process? Do you have ongoing ESG reporting requirements for the funds you invest in/assets you have exposure to?)
Screening and Manager Selection:
Private equity staff undertake a screening process for all private equity investment proposals. This process includes reviewing the General Partner’s (GP’s) ESG policies. The overall investment proposal score will help private equity determine whether to move forwards to diligence the investment opportunity. ESG is considered alongside other investment factors necessary to reach an informed decision. A manager’s ESG policy, or lack thereof, will not exclude a proposal from moving forwards to the formal diligence process; rather, it will be considered in the context of evaluating all relevant investment parameters.
As part of the due diligence process, private equity staff:
- Request the firm's ESG policies
- Inquire about the way GPs identify, monitor, mitigate and resolve ESG issues
- Understand how GPs have previously identified and addressed meaningful ESG risks as well as opportunities in their portfolio
- Consider the GP’s approach to incorporating ESG factors into investment decision-making and ownership activities, and asks for examples on how they engage portfolio companies on ESG factors
- Inquire about GP’s procedure for identifying ESG-related issues to investors
- Request disclosure on any ongoing ESG litigation related to ESG issues.
All these topics are inquired about in the standard ILPA DDQ which has a dedicated section on ESG.
Final diligence reviews on new investments will include an ESG section. Material ESG issues may be discussed at the Private Equity Investment Review Committee (IRC) before voting and final investment approval occurs. The discussion around ESG issues will depend on their relevance to a particular investment opportunity.
CalPERS Private Equity requests that its private equity fund managers comply with the reporting practices in accordance with the ILPA’s Fee Reporting Template. Also, Staff asks the GP questions about pending or existing litigation, including material litigation pertaining to ESG.
Additionally, for the top 10 managers in the private equity portfolio by value, staff will inquire at the annual LPAC meetings regarding the Firm’s ESG-related issues, including:
- Their ongoing process for identifying and acting on ESG-related opportunities and risks
- New or ongoing litigation issues pertaining to ESG
- Material ESG issues that may impact the value of the portfolio, including such items as assessing climate change risk
- For all other managers, private equity Staff will document any ESG-related issues they become aware of in periodic meeting notes
- Private equity staff will review private equity manager ESG reports
What are your ESG goals within private equity for the next 1-3 years?
- CalPERS has made efforts to evaluate the carbon footprint across its asset classes. Private equity staff will look for best practices among other institutional investors to help conduct a carbon footprint.
- Last year, private equity staff conducted an ESG Survey across all private equity managers, inquiring about the GP’s ESG Policy, dedicated ESG staff and ESG reporting. Staff would like to continue the practice of these types of succinct annual ESG surveys to gain deeper understanding of the managers’ approach to ESG.
ESG has been the hot topic within the private equity industry for a number of years; however, levels of adoption/integration vary widely and some question the value of ESG to entities with fiduciary responsibility. What are your predictions for ESG’s role within the private equity industry over the next 5-10 years?
Interest in ESG topics has been growing across all asset classes, including private equity. In our opinion, some developments will likely play a role in the private equity industry over the coming years, specifically:
- LPs are increasingly requesting ESG disclosure
- Inclusion of ESG questions in standard questionnaires such as the ILPA DDQ has solidified ESG as an important diligence topic
- The GPs will increase the amount of ESG-related disclosures in quarterly reporting
- Tools, such as GRESB for Real Assets, will likely emerge for private equity. These will enable GPs to better monitor the sustainability-linked performance of their managers and portfolio companies
- Climate-change-related risks and opportunities will increasingly affect asset allocation
Take a look at our previous Q&A with CalPERS Staff: What Does ESG Mean for CalPERS?