US private equity expects ‘extremely positive’ ESG rules impact

Strongest level of overall optimism recorded across all the regions surveyed by PwC

The private equity market in the US largely believes Security Exchange Commission rules on ESG are positive for the sector, according to a PwC survey.

In the US, a respective 71% and 69.2% of limited partners and general partners expect the SEC proposed ESG-related rules to have an extremely positive impact.

This is the strongest level of overall optimism recorded across all the regions surveyed, from Europe and the UK to the APAC countries.

PwC analysis also suggests 97% and 94% of US limited partners and general partners are planning to increase their assets under manager in private market ESG products over the coming 24 months – the largest degree of willingness recorded across all regions.

The data comes from a new report titled, GPs’ Global ESG Strategies: Disclosure Standards, Data Requirements & Strategic Options.

The findings are based on a wide range of primary data gathered through a survey of 300 general partners and 300 limited partners around the world.

ESG was found to represent an unyielding focal point of the global private market landscape, but its importance varies by regions around the globe.

According to the data, both private equity limited partners and general partners are recognising the importance of redirecting private capital towards sustainable objectives.

This is seen as a crucial aspect of generating value and bringing about a green transformation of the economy.

Almost all (87.5%) limited partners surveyed are planning on increasing their private market ESG investments over the coming two years, with more than a third targeting increases of more than 20%. 

Asset managers are responding, with 86.5% of those surveyed planning to expand their ESG private market offering over the coming 24 months in order to grasp this demand, of which almost half are planning to expand their ESG product shelves by over 20%.

Private equity limited partners and general partners currently have the lowest average asset allocation towards ESG products across the private market realm.

Only 57.4% and 47.6% of private equity limited partners and general partners allocate over 30% of their assets to Article 8 products. 

These figures fall well below the average 63.7% and 62.1% figures recorded among their real estate, infrastructure and private debt counterparts.

However 66.6% of limited partners surveyed stated they are willing to accept higher management fees in exchange for notable improvements in their general partners’ ESG data reporting. 

Nearly 45% stated they would be willing to pay between 5% and 9% more in management fees should this price increase be translated into quality improvements in their general partners’ ESG data reporting practices. 

An additional 23% of limited partners stated their willingness to absorb increases in excess of 10%.

Private equity international standards

Overall across all regions the survey results suggested the global asset management community are strong supporters of the International Sustainability Standards Board goals, which aim to deliver a global baseline of sustainability disclosures to meet capital market needs.

More than two-thirds (68.1%) of the private equity general partners surveyed expect the standard to successfully harmonise global ESG disclosure standards. 

Limited partners appeared to be marginally more optimistic than their general partner peers, with 72% expecting the framework to succeed in its aims.

Olivier Carré, financial services market leader at PwC Luxembourg, said the global private markets landscape is “on the verge of a substantial ESG-led transformation”. 

He said: “Limited partners across the world have been increasingly focusing on ESG considerations across the different private market asset classes, while general partners who fail to adapt to changing investor demands risk losing business from the fast-increasing number of ESG-oriented investors.”

In this rapidly changing backdrop, general partners need to “rethink their modus operandi and embed sustainability data and capabilities at the heart of the corporate culture and investment process”, said Carré, in order to keep abreast with regulatory developments, meet investor expectations and use the sustainable transition as a differentiating factor.

While opportunities and challenges vary greatly from region to region and asset class to asset class, the key message remains the same, he added, “rethink the status quo and view your operations and license to exist through an ESG lens”. 

“In doing so, general partners not only stand to minimise financial and reputational risks, but are in fact positioning themselves to unlock to full long-term value creation potential inherent to ESG integration,” Carré said.