More institutions are weighing whether to link asset manager’s compensation to performance on environmental, social, and governance issues said people who consult with investors and help private-equity firms raise money.
Advocates of linking pay to ESG say it shows firms mean business. Private-equity firms regularly talk up their ESG policies, but there are little data on how well the industry as a whole performs on these issues.
Whether these efforts gain traction or remain exceptions, ESG-focused private equity is booming, aided by hopes of friendly policies expected from the Biden administration. The buyout industry’s heavy hitters-including Blackstone Group Inc., KKR & Co., and Apollo Global Management Inc.-have in recent years set up or said they would launch units for impact investing.
As of last year, U.S.-based investors and asset managers held $17.1 trillion in strategies incorporating ESG into their decision-making process, up 42% from two years earlier, according to the Forum for Sustainable and Responsible Investment, a nonprofit group focused on ESG investing. About $716 billion of that sum was managed through alternative funds, including private equity, venture capital, and hedge funds, 22% more than in 2018, the group said.
Despite the surge in assets, little data are available on whether private-equity impact funds actually meet their ESG goals. A survey last year of alternatives investors by data tracker Preqin Ltd. found 69% don’t require any ESG reporting from fund managers. Even among the more than 450 private-equity firms that committed to the Principles for Responsible Investment, a United Nations-affiliated investor network, just 21% disclosed ESG information to the public, the group said in 2018.
But the fog around the industry’s actual ESG impact is slowly dissipating, said Amit Bouri, chief executive of the Global Impact Investing Network, a nonprofit group that promotes impact investing. Investors are no longer satisfied with vague promises about ESG benefits, and firms now need to measure impact to raise money, he said.
Challenges in linking ESG performance to pay to include a lack of agreed-upon standards for measuring the effects of investments, Mr. Bouri said.
Data and standards will drive ESG performance and the related returns and compensation that will come from it.