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Europe leads the way on ESG integration as alternative managers show improvements across the board

News Team, 11/06/2019

New research from alternative investment manager LGT Capital Partners (“LGT”) reveals that European alternative managers continue to perform best on environmental, social and governance (“ESG”) issues.

The analysis also shows that the topic is gaining traction in Asia and the US. Both regions recorded a nine-percentage point improvement in the proportion of managers ranked “good” or “excellent” compared to the findings from 2018.

Europe, however, continues to lead the way on ESG integration. This is especially the case  in private equity where 79 percent of managers were ranked as ‘Excellent’ or ‘Good’. By contrast, in the US and Asia only 49 and 59 percent of managers respectively received top ESG ratings of ‘Excellent’ or ‘Good’.

This is the seventh annual ESG report from LGT, which assesses 304 managers worldwide, grading them on how successfully they have integrated ESG factors into their investment activities.

Alongside comparisons between different regions and markets, the report also measures issues such as the level of popularity for ESG processes. This year’s report suggests that that ESG integration is becoming a mainstream matter in private equity. Key findings released in the analysis include that 65 percent of private equity managers are rated as either ‘Excellent’ or ‘Good’ for ESG integration, an increase from to 58 percent in 2018.  Meanwhile, the total of hedge fund managers earning top marks on ESG (rated ‘Excellent’ or ‘Good’) has increased to 15 percent, up from 9 percent last year. One factor believed to be driving this progress is the increased accessibility to quality ESG data on public companies.

Another factor revealed in the report is that size continues to significantly influence a managers’ ability to integrate ESG into their investment activities. Although 78 percent of large managers and 95 percent of mega managers have institutionalized ESG practices in place, only 62 percent of middle-market managers and 56 percent of small managers have done so.

Diversity is also becoming a more important issue on the agenda of many private equity managers with 45 percent reporting that they have a diversity policy in place, while 36 percent consider diversity and inclusion in their investment process.

Alongside the report, LGT has additionally announced the development of a new long/short hedge fund strategy. In the strategy, ESG will be a key criterion for selecting portfolio companies. Furthermore, it has begun developing a tool in response to the perceived growing importance of the UN Sustainable Development Goals (SDGs). The tool will calculate the impact of companies and whole portfolios – both negative and positive – on the SDGs. This could potentially offer greater insight to investors into both portfolios and underlying companies, allowing them to improve their SDG compliance while retaining diversification and attractive risk-adjusted returns.

Tycho Sneyers, Managing Partner at LGT Capital Partners and board member at UN PRI was pleased by the findings of the report.

He said: “We are encouraged to see progress on ESG in Europe, the US and Asia, albeit from very different starting points. One theme that clearly stands out this year is the growing importance of the SDGs. Investors are increasingly turning to the SDGs to make their sustainable investment activities more outcome orientated, and they have high expectations for the goals.”

LGT Capital Partners is an alternative investment specialist with over $60 billion in assets under management and over 500 institutional clients in 37 countries.

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