Poor ethics undermine investor confidence

Seven out of 10 institutional investors would turn down a co-investment opportunity if the social or environmental risks were too high, research carried out by PwC has found.

The firm’s Bridging the Gap survey explored the views of 60 limited partners around the world and their attitudes to environmental, social and governance (ESG) investment issues.

While 71% said their fund allocation was now linked to achieving responsible ESG conditions, 97% expected responsible investment to increase in importance over the next two years. Fiduciary duty, reputational risk and corporate values ranked as the top three reasons for responsible investment.

Those surveyed included institutional investors – pension funds, investment managers – and sovereign or government controlled funds, such as the California State Teachers Retirement System and the UK Universities Superannuation Scheme.

“Since the financial crisis, investors are under ever-greater scrutiny regarding their wider environmental and social impact and purpose. The expectations of regulators, policymakers, NGOs [non-governmental organisations] and the public for investors and their advisers to behave responsibly and deliver more than simply financial return are much higher than before.”

“We need to see more active integration and interrogation of ESG matters in private equity investment. It could shift the power of institutional funding from being a threat of withdrawal, to a force to embed a transition to a low-carbon economy, not only setting the timeline for change, but securing vital funding for it, too.”

Phil Case, director, PwC.

Responsible investment acknowledges the relevance of ESG factors alongside traditional financial metrics, and can help protect value and enhance returns. PwC’s survey reflects recent controversies around institutional investment. For example, campaigners have called for the withdrawal or scaling back of investments with potentially negative environmental impacts, such as fossil-fuel-related activities.