ESG Exclusion
Investors do not only expect financial returns. They also expect ethical and responsible business practices which reflect their values and political views, and therefore seek to exclude certain investments based on specific ethical guidelines. For example, certain university endowments shy away from any GPs that would invest their money in the coal industry, as their student body wants to address climate change.
Many large LPs have an exclusion list which GPs have to factor in at the pre-investment stage. When prospective investment opportunities are evaluated against industry exclusion lists, the process is called “negative screening”.
ESG Exclusion
ESG Integration
Targeting the Impact
ESG Exclusion
ESG Integration
Targeting the Impact
ESG Integration
This is an approach that seeks to incorporate both values and pragmatism. While the exclusion list can play a significant role, this philosophy looks beyond that, placing an important focus on risk management. Investors may cherry-pick relevant risk factors and incorporate them into their investment decision-making, monitoring processes of integration post-investment to avoid monetary and reputational damage.
Preqin data shows that ESG concerns can make or break a deal. Of investors, 37% say they have already turned down an investment due to ESG-related risks, and 43% would do so if they encountered such concerns. Implementation of ESG considerations or ESG policy is intertwined with the regular investment decision-making process. Dedicated ESG teams or trained investment staff are often responsible for the incorporation of ESG policy within firms.
Targeting the Impact
This approach is more difficult to implement because it requires in-depth analysis and resources to evaluate investment opportunities. The goal of this approach is to seek measurable positive environmental and social impacts from the investment. However, this goal is sometimes at the expense of profitable returns.
Examples of investments made with the intention to generate a well-defined set of social or environmental goals could include social bond-fund investing in areas such as education or affordable housing. Investments of this kind are often focused on smaller private companies and community groups, working to solve specific social or environmental problems. Working capital would be provided to underserved communities, or focused on a theme such as sustainable agriculture, renewable energy, conservation, housing, healthcare, or education, to meet the goals of this approach. Alongside this kind of fund allocation, investors would also wish to see positive financial returns.
This approach is often achieved through operation of Impact or Sustainable Development Goal dedicated funds, as these set forth very clear intentions and expectations for investors.
Venture Capital
Investment in young companies with high growth potential
Real Estate
Investment in private real estate properties, either commercial or residential
Infrastructure
Investment in private infrastructure assets, such as toll roads, airports, or utility facilities
Private Debt
Debt investments that are not financed by banks and are not issued or traded in an open market
Natural Resources
Private investment in natural resources such as oil & gas, timberland, farmland, water, and mines
Venture Capital
Private Debt
Real Estate
Infrastructure
Natural Resources
