Pressure is mounting on South Korea’s private equity (PE) industry to take environmental, social and governance (ESG) matters seriously, as limited partners put more focus on investee companies’ climate change risk, diversity efforts and governance practices.
Several PE firms have recently contacted consulting firms to inquire about how ESG factors can be integrated into their governance practices and investment strategy, according to industry sources. The move is seen as part of efforts to respond to demands by pensions and other institutions for more sustainable, socially-conscious corporate behavior.
“Limited partners have become more concerned about ESG issues when making investment decisions, asking PE firms to incorporate ESG considerations in their investment processes and including the ESG performances of investee companies in a fee structure,” said an industry insider.
“In response, PE firms have started to pay greater attention to ways to integrate ESG factors into their investment strategies.”
When the Export-Import Bank of Korea last month issued a request for proposals for a 50 billion won ($44.5 million) New Deal investment mandate, it required that ESG factors be incorporated into investment decision-making.
Interested managers have to specify ESG principles in their proposals – including whether or not they have adopted a stewardship code – their track record in ESG investing and a way to work with a third-party firm to evaluate the ESG performance of investee companies.
Korea Development Bank and Korea Growth Investment Corp also considered ESG factors of candidates for the first time in its selection process when it recently finalized 26 managers for New Deal investment mandates totaling 1 trillion won.
“National Pension Service, which is likely to issue a request for proposals for private equity mandates in the coming months, is also expected to require managers to incorporate ESG considerations into their investment strategies,” said another industry insider. “Other South Korean institutions will likely follow suit.”
Demand for ESG consulting services from PE firms is expected to increase in the future, industry watchers said.
“A greater understanding of ESG issues by PE firms is critical, given that a growing number of institutions are putting more focus on socially responsible investing,” said an official at one proxy advisory firm in Seoul.
“PE firms also need to be prepared if they want to expand their exposure to overseas assets, because ESG investing is becoming the mainstream globally,” the official added.(Reporting by Byung-yoon Kim)