Bridging the gap: Aligning the responsible investment interests of limited partners and general partners

The growing need to demonstrate responsible investment practices is an important influence on business behaviour in society. Responsible investment (RI) is no different to any other investment decision; it is guided by the principles that managing exposure to environmental, social and governance (ESG) risk issues and identifying opportunities to implement improvements in these areas will protect and increase value. It leads to a natural selection, choosing businesses deemed to be more sustainable and less likely to suffer operational or reputational concerns, or fall foul of regulation.

This report describes the results of our engagement with Limited Partners (LPs) to explore their perspective. It's quite clear that responsible investment currently plays a significant role in their investment decisions with:

• 71% of the LPs interviewed saying they would decline to participate in a General Partner's (GP's) fundraising, or would turn down a co-investment, on ESG grounds.
• 18% of LPs interviewed having withdrawn from an investment or withheld capital on ESG grounds.

RI will continue to do so in the foreseeable future, with 97% expecting it to increase in importance over the next two years. For GPs then, it is critical to get this right, to satisfy the growing expectations of the LPs.

It is a relatively new era, though, that's still finding its way. It's clear that discomfort remains between LPs and GPs on how to achieve their RI objectives, and that their expectations and approaches are yet to align. It's a gap that feels destined to be bridged - with 88% of LPs interviewed believing there is added value in RI, there is a sense of continued optimism around it and willingness to pursue it.

Many of the comments and findings in this research (and in previous PwC research) indicate a disconnect in views, particularly in ESG data needs, to support decisions. It would be easy to say that more discussion is needed between LPs and GPs to define a single approach, to avoid numerous onerous data collection exercises, and to gain a better understanding of the objectives of both sides. But, LPs and GPs have already embarked on this journey and developed the ESG Disclosure Framework - launched in 2013, for reporting ESG information. (Work on an LP due diligence questionnaire is also underway through the Principles of Responsible Investment (PRI).)

When we talked to LPs, they were generally clear on what they wanted from GPs but there was little sense that the ESG Disclosure Framework is the final piece of the information jigsaw - in fact, 47% said they never use it. Developing a process that works for everyone is still very much a work in progress. To many, such initiatives may feel idealistic or like an onerous layer of administration, but to an industry where there is a growing belief that RI is a driver of value, they are not to be taken lightly. It was clear from our dialogue with LPs that there is greater emphasis on quantifying the value that RI creates; 74% of respondents indicated that they would find this very useful while only 19% currently attempt to do this.

The debate surely will follow with GPs to understand the cost and resource implications involved and to reach a practical solution that works for both. It is evident, though, that it takes more than debate - both GPs and LPs need to commit to adopting and implementing proposals to secure a mutually acceptable way forward.

This article is an extract from a larger report. Read report.