It is de rigueur to label everything as sustainable – including in private equity. In a new working paper, we examine the claims of the top 100 private equity firms in the United States as to their committment to ESG. These firms represent more than $1.5 trillion of capital and directly employ 12 million individuals. We read and examine every document that each firm discloses on its website. Although most of the firms have catchy slogans like “together for a green future” or “A diverse and inclusive workforce is in our core” – the slogans are not backed by data. In fact, other than boilerplate language, 58 percent of PE firms have no substantive information about their ESG practices.
The data are shocking. Only 11 percent of the firms have information on their environmental practices, only 22 percent have an official diversity, equity, and inclusion policy, and only 21 percent have an ESG policy. Six percent of PE firms have a dedicated ESG fund. Thirty-nine percent of the firms have an extensive discussion on the social aspect of their ESG programs, but only 19 percent have at least 10 percent female representation in top management. When it comes to environmental matters, 71 percent of the firms are signatories to environmental frameworks that are easy to implement and require no external oversight or any particular actions. Only 8 percent of firms signed on with TCFD and only 6 percent with SASB – the two environmental frameworks with stringent requirements.
Major goals of the ESG movement are more transparency and greater emphasis on the long-term in financial markets and the economy. Given the numbers above, though, it’s no wonder that few investors and customers trust sustainability claims. For example, a recent McKinsey survey shows that 85 percent of Gen-Z respondents do not find ESG information by fashion brands credible.
What is truly green and what is a greenwashing, and how can consumers separate the two? The current outlook is bleak. There are about 700 ESG rating agencies in the U.S. and Europe alone, each profiting from selling financial products, consulting services, and ratings, but their methodologies are opaque. Goldman Sachs was recently fined for misleading its clients about ESG investments. BlackRock has declined to explain its ESG methodology yet sells a host of ESG products. The signatories to the UN-sponsored Principles of Responsible Investment now number more than 4,000, and they manage more than $140 trillion in assets. Yet the data suggest that very few of them have taken concrete actions to advance ESG.
Our analysis reveals that PE firms have fallen into the same pattern as publicly held corporations: ESG adoption rates are low and practices are haphazard. We do not argue that companies must adhere to specific ESG policies or practices. We do believe, however, that (a) consumers and investors deserve accurate information, and (b) the standards for labelling products and practices as ESG friendly must be transparent and uniform. This is particularly true of private equity firms, whose vast wealth and resources make them enormously influential. Perhaps they would benefit from a carbon counting mechanism or a formal audit and certification system. Whatever the answer, without a clearer and reliable process for validating their claims to be ESG compliant, we cannot relax while drinking truly sustainable coffee.
This post comes to us from Garen Markarian, a professor at HEC Lausanne and former economic officer for the United Nations, and Alexander Semionov a graduate student at HEC Lausanne. It is based on their recent paper, “ESG in the Top 100 US Private Equity Firms,” available here.