January 14, 2013
Interviewed by: David Snow
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Sign Here For Responsible Investing

What are the Principles for Responsible Investment and how do they relate to private equity? Rob Lake, Director of Responsible Investment at the Principles for Responsible Investment Initiative(often called the UNPRI), tackles these and other questions in an interview with Privcap.

Lake details the mission of the PRI, its history with the United Nations, what the PRI’s ambitions are within the global private equity market, why private equity’s investment model offers control advantages not afforded public-market investors, how US investors have reacted when asked to become signatories, and what Lake has learned about the importance of responsible investing from other asset classes.

What are the Principles for Responsible Investment and how do they relate to private equity? Rob Lake, Director of Responsible Investment at the Principles for Responsible Investment Initiative(often called the UNPRI), tackles these and other questions in an interview with Privcap.

Lake details the mission of the PRI, its history with the United Nations, what the PRI’s ambitions are within the global private equity market, why private equity’s investment model offers control advantages not afforded public-market investors, how US investors have reacted when asked to become signatories, and what Lake has learned about the importance of responsible investing from other asset classes.

Privcap: What is the PRI?

 Rob Lake, PRI: Principles for Responsible Investment is a network of institutional investors worldwide. We have around, about now, 1,150 members. Of those, about 260, 270, are asset owners, so LPs in private equity terminology, and then 800 or so investment managers, GPs from the private equity world included in that, and a variety of service providers. The organization was set up about six years ago, driven by some of the largest pension plans in the world from both sides of the Atlantic and the Far East, actually, on the basis of a recognition that in the modern world—given some of the complexities in the trends in globalization and some of the evidence on things like climate change—this cluster of issues that has come to be called environmental, social, and governance really can be financially significant. And so the purpose of the organization is to stimulate collaboration among investors to work out what that means in practice across asset classes, across markets.

Privcap: Please describe your affiliation with the United Nations.

Lake: The organization now is governed by the investors. Asset owners—the big public pension funds, in particular—hold the majority on the governing body, the advisory council, right at the top. But we have a formal partnership with the United Nations—two parts of the United Nations system, the Global Compact and the UN Environment Program—but the governance lies very firmly with the investors themselves.

What we’re trying to do within private equity is essentially stimulate greater alignment between LPs and GPs on some of the factors that people are increasingly coming to realize are relevant to long-term value creation and risk management on environmental, social, and governance factors. So we’re looking to stimulate understanding of what those issues mean in the practical context of individual sectors and markets and build the understanding on both sides, the LPs and GPs, to align those interests and ensure that the best outcome can be achieved.

Privcap: What is unique about private equity that spells opportunity to put the principles to work?

Lake: If anything, there are advantages, given the particular structure in the way that private equity works. So at the due diligence stage, if there are problematic issues, you could argue, with no disrespect to public markets folks, that you are more likely to spot them in a private equity context than in listed equity. So you have your due diligence opportunity, do your deep dive, you can look at everything that might be relevant to your decision to buy and everything that might be relevant when it comes to the ongoing management of your asset.

Once you are in there, once you have decided to buy in, you are in a strong position to exercise influence. You might have a controlling position. You might have a significant minority position. And if there’s a need to exercise influence and get something done, you are very well placed to do it in a stronger position, arguably, then you might be in the context of listed equity. So actually, when it comes to ESG issues, private equity has a bit of a head start in being able to see the challenges and then respond to them.

 

Privcap: How successful have you been at bringing new signatories on board?

Lake: Well, in general, we’ve seen very, very strong growth worldwide—north, south, east, west, emerging markets, developed markets, well in excess of 1,000 signatories worldwide. So that’s very encouraging. Inevitably there are some markets where uptake of PRI has been stronger than others. There’s been very, very strong interest in Europe, in Australia. In the U.S., we have some of the largest pension plans as members.

We have the largest private equity managers, the GPs, as well. But some of the terminology that we use—sometimes related to issues like environmental, social, and governance factors or sustainability—needs to be communicated very carefully. What we’re talking about here really is factors that are significant in financial terms to long-term value creation. We need to communicate that clearly. We have staff on the ground now in the U.S. reaching out very, very actively to people in the States, and we’re making good headway there, too.

Privcap: What have you learned about the importance of PRI in other asset classes?

Lake: Well, essentially, if you just take listed equity, there’s been a series of incidents—some of them very tragic, unfortunately—which demonstrate very, very clearly just how closely related to value creation or destruction in the financial sense ESG factors can be. You only have to look at BP in the Gulf of Mexico or Longman in South Africa, with the tragic deaths of so many people shot by the police when they were on strike at that mine site. There’s been a series of these things which demonstrate that environmental factors, social factors, bad corporate governance, can be very material when it comes to financial returns.

An industry is an industry. You can invest in it through listed markets or private markets, but ultimately the issues on the ground will be very similar. And that’s what we’re talking about here: the need to understand and manage those risks.

Privcap: What responsibilities do GPs and LPs take on after becoming signatories?

Lake: We run a series of programs bringing together the LPs and the GPs to work on the practicalities of what those issues are. For example, we’re doing some work right now working with PWC, looking at ESG on exit. PWC is interviewing trade buyers to get an understanding of the focus and the value that they attach to ESG. The answer to that is, in fact, their interest is growing very strongly. So there are practical programs like that.

And then, on the reporting, we run an annual reporting process which every PRI signatory has to go through, asking people to demonstrate the practical steps that they are taking to implement the principles and practice. The principles are a public commitment. So it’s important to have a public demonstration of what people are in practice doing. As GPs do, that will enable LPs, their clients, or prospective clients to see clearly what the practical implications of their commitment to PRI are.

Privcap: What is the main message that your organization has for investment groups around the world?

Lake: The headline message, to be honest, is that investors around the world—asset owners, investment managers, right across asset classes and certainly very strongly in private equity—are seeing that environment, social, and governance practices historically have been neglected. And that given the complexities of the markets we now work in—the fact that everybody is looking to squeeze every ounce of return that they possibly can out of every part of their portfolio—ESG is really significant. I think the question now is not whether it’s financially significant; it’s the details of how the issues work, sector by sector, market by market, at different points in time. And that’s what PRI is working in. And we very much hope that more people will become involved in joining us in that endeavor, in the private equity industry and more generally across the investment community.

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