David Russell, the London-based co-head of RI at the approximately £30 billion University Superannuation Scheme (USS), said the private equity sector has “moved a long way in a very short period of time” and has moved substantially faster than the public equity part of the financial community in integrating responsible investment into its processes.

“There’s still a long way to go,” he told Environmental Finance, “but private equity has been a success for responsible investment over the last two years.” 

He noted the work done by the UN-backed Principles for Responsible Investment (PRI), and pointed to a recent conference bringing together several hundred limited partners (LPs), or investors in private equity funds, and the general partners (GP) who manage the funds. 

“It’s one of the most successful outputs from the PRI thus far,” he said. 

Last month, US private equity giant Kohlberg Kravis Roberts & Co (KKR) announced the extension its Green Portfolio Programme, which it is carrying out with the Environmental Defense Fund (EDF), an NGO. EDF is also working with Carlyle, another leading US private equity group. 

“KKR is looking at [environmental] synergies across its business,” said Russell. “Two years ago, they weren’t doing that.” 

“There is a recognition that [social and environmental] issues can affect value,” he added, noting that, among UK-based private equity firms, Doughty Hanson was taking a lead on RI. 

USS is in the process of moving a fifth of its total assets – worth around £6 billion – into alternatives, including private equity funds, hedge funds and timber. 

Because the pension fund, which pro vides for the pensions of more than 250,000 employees in the UK’s higher education sector, integrates responsible investment across all its holdings, the fund’s RI team has been developing processes for its alternatives portfolio. 

“It’s not about setting targets or hurdles. We don’t say: ‘You have to take this or that approach’ ... We say, ‘How do you integrate environmental and social issues into your due diligence and, once you have invested, your asset management. Have you got processes in place?’” 

USS has a detailed due diligence process to assess GPs in this area, and is implementing an ongoing assessment programme.  

“Private equity does look at these issues, as they don’t want to buy lemons. They’re particularly focused on picking up environmental liabilities.”

Mark Nicholls