Most Asian fund general partners (GPs) prefer not to reject an investment due to sustainability concerns because they are confident they can create value by improving a company’s ESG credentials.
This is according to a report, Asia Funds ESG Report, from law firm Morrison & Foerster in conjunction with private equity intelligence provider AVCJ.
Although some fund managers outright reject investments if an ESG issue comes up during their due diligence, most do not, and instead see it as an opportunity to improve a company’s valuation by encouraging better ESG practices.
The report, which surveyed 100 Asia-headquartered fund GPs with assets of at least $1bn, found that only 23% of GPs say they have rejected an investment after screening for ESG factors.
On the other hand, 91% of those surveyed claimed they were confident they could make improvements at potential investment targets with negative or neutral ESG credentials. This was an increase from 82% from last year’s survey.
Entrenched issues
Investors in Asia aren’t looking the other way when it comes to ESG issues, but they are instead convinced they can resolve the problem once the business is in their portfolio, the report said.
However resolving the problems at companies isn’t always as straightforward as most expect when behaviours are entrenched, according to some respondents.
One Singapore-based CFO surveyed expressed some buyers’ remorse: “The company was not considering the value of social responsibility and we had to make changes to their entire outlook over time; it has been quite challenging.”
Morrison & Foerster noted that the participants surveyed believed that doing the necessary ESG work would increase financial returns over the medium to long term.
A senior managing director from Japan from the survey said: “We cannot ignore all investments with neutral credentials—there is still a lot of value to gain from these organisations if we are ready to apply our knowledge and experience.”
The report found that although the vast majority (84%) of respondents said they conduct ESG due diligence on most or all deals, this was an 8% decline from last year’s 92%.
ESG regulation
While ESG regulations in Asia are still lagging behind Europe and North America, it seems that most Asian fund GPs see this as a chance to add value as investors.
“My clients definitely understand how incorporating sustainability considerations in their investment and asset management processes can increase a company’s valuation and mitigate risk from future regulatory requirements,” said Marcia Ellis, global co-chair of Morrison Foerster’s global Private Equity Group.
“However, as the discourse and debate around sustainability matures globally, it’s also clear that ESG policies and their implementation will look different here in Asia due to various regulatory regimes, geopolitical developments and macroeconomic factors.”
Susan Mac Cormac, global co-chair of Morrison Foerster’s Global ESG Group, said the reason GPs are committed to integrating ESG and sustainability considerations is because it allows them to “see around corners” to prepare for emerging risks such as cybersecurity and capture opportunities in areas like responsible technology.
