Governance pressure cranking up on Asian PE

Private equity firms in the region are being forced to adopt higher ESG standards because of the need to attract European capital commitments, reveals an industry association.
Governance pressure cranking up on Asian PE

Asian private equity funds are being forced to adopt higher standards of governance because of pressure from European investors, according to an industry association.

Environmental, social and governance (ESG) policies have been driven up the corporate agenda in the West in recent years, but in Asia the concept is still nascent.

Nevertheless, Jessica Robinson, CEO of the Association for Sustainable & Responsible Investment in Asia (ASrIA), said that ESG change was likely to be rapid in Asia in the coming years. The key driver for Asian PE funds to adopt ESG guidelines was to attract investors from Europe, she noted.

“I think that change is going to be very rapid over the next couple of years ” said Robinson. “I think the biggest growth area [for growth in sustainable investing in Asia] is private equity." 

She observed that stock exchanges around the region were spending a lot of time and energy on ESG-related issues, citing mandatory ESG disclosure rules announced by Singapore's stock exchange last year. A greater focus on governance has been highlighted as a key issue for 2015.

The London Business School (LBS) this week released a report highlighting the gap between the adoption of ESG box-ticking guidelines and the implementation of ESG policies across investments.

The study found that "guidelines" were adopted by 86% of Asia-Pacific focused funds. In contrast, 50% of European funds had implemented industry-specific ESG policies, while 36% took a guideline approach, suggesting commitment in Asia was more superficial.

Francesca Cornelli, professor of finance at the LBS and director of the Coller Institute of Private Equity, said it was natural to see interest growing in ESG issues alongside rising average incomes.

According to a study she co-authored, investors are the leading source of pressure for adoption of ESG policies among Asia-Pacific focused firms, but the public will be the leading source of pressure in future. 

Sven Lidén, CEO of Adveq – a private markets investor with $6 billion AUM – observed that the private equity (PE) industry had moved rapidly in recent years to adopt ESG policies.

Asia-based institutional investors are insisting on higher standards. For example, Japan’s Financial Services Agency introduced “Principles for Responsible Institutional Investors” in February last year, which has since been adopted by more than 160 institutions in the country. Initiatives have also been undertaken in countries ranging from Korea to Singapore to Malaysia.

Rodney Muse, managing partner of Malaysia-based Navis Capital Partners, said investors had become increasingly demanding. “Fifteen years ago you told a limited partner what was necessary in order for him to decide whether to invest and not much more. Today there is total transparency, you should expect them to really get deep into your processes as an investment firm,” he said.

The same was true when it came to exiting PE investments, added Muse. Corporate buyers just would not take the risk if they saw inadequacies around corporate governance or environmental practices, he said.

Another study released yesterday by the Global Sustainable Investment Association stated the US, Europe and Canada accounted for 99% of global sustainable investing (SRI) assets and estimated the sustainable investment market had grown from $13.3 trillion at the start of 2012 to $21.4 trillion in 2014.

SRI assets have grown from 21.5% to 30.2% of professionally managed assets globally over the same period, according to the review. For Asia-Pacific, the figure has increased from 0.6% to 0.8% compared with 49% to 58.8% for Europe.

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