ESG and Private Equity: In conversation with Montagu

In our latest mini podcast series - ESG and Private Equity: In conversation with Montagu - James Marlow from the Linklaters ESG team sits down with Kim Woehl and Abhishek Kumar at Montagu to discuss Montagu’s ESG journey, including their ESG strategy, having science-based targets, and ESG at the investment stage and portfolio company level.

ESG continues to rise up the agenda in the private equity space. According to a recent study published by LGT Capital Partners, 47% of private equity managers are now addressing climate change through their ESG policies, an increase of 13% over the last year, with Europe continuing to lead the way on ESG integration (see here).

In November, the Net Zero Asset Owner Alliance (NZAOA) published a “call to action” setting out their expectations on climate for private markets asset managers in. The aim is to encourage all asset managers (in particular those that are not yet sufficiently addressing climate risk) to raise their level of climate ambition to align with Alliance members’ net-zero commitments. The Alliance warn that private market asset managers appear to be failing to keep pace with decarbonisation efforts. The Alliance, which is made up of more than 80 asset owners, have committed to transitioning their portfolios to net zero by 2050. The call to action sets out minimum expectations, as well as key recommendations for all private asset managers to align their investments with a 1.5°C pathway and to address climate change across all their business activities. According to Patrick Peura, UN Asset Owner Alliance Engagement co-lead and ESG engagement manager at Allianz, given the clear signals on the Alliance’s needs, asset managers that aren’t providing a plan to reach net zero will find that it is increasingly difficult to win mandates (see here).

Initiative Climat International (iCI) have produced guidance for firms to set and meet portfolio-level net-zero targets. Hosted by the UN Principles for Responsible Investment (PRI), iCI is a decarbonisation group for private equity investors and managers. The guidance makes the case for private equity firms to set net zero targets for 2050 or earlier, and answers common questions around the topic. The document also provides a list of other net zero and decarbonisation guides and resources available to private equity firms, including the TCFD’s “Implementation Considerations For Private Equity Firms”, the Science-based Targets Initiative’s guide for private equity and the IIGCC’s Net Zero Investment Framework.

The UN PRI have also produced a template ESG due diligence questionnaire for venture capital investors. VC firms should expect to be asked these questions by potential LPs. The PRI had previously produced a similar ESG due diligence template for later-stage growth equity and buyout investors, which has seen widespread uptake. According to New Private Markets, many GPs have said that they often receive versions of the PRI’s private equity questionnaire from potential LPs (see here). The questionnaire asks about the fund manager’s sustainability policies and processes around decision-making, monitoring, measuring and reporting. It is split into sections to reflect different stages of fund management, including fundraising, dealmaking, portfolio management, and exits.

For those less familiar with climate change and other ESG issues, Invest Europe have a number of helpful guides and online training modules:

• Climate Change Guide
• ESG Reporting Guidelines
• Introduction to Climate Change for private equity professionals
• Engaging portfolio companies with ESG climate change requirements
• Integrating climate change goals in the business agenda