By Michelle Phillips
Responsible investing and Asia would seem to mix like clean water and oil. China and India are ranked among the worst polluters in the world, according to the 2012 Environmental Performance Index, and in many emerging markets, profitable industry trumps quality of life issues at the policy level.
Global investors have been seeking a better balance between social responsibility and profit through the UN Principles for Responsible Investment Initiative (PRI). But in Asia, the pitch hasn’t been well received.
Since 2006, the PRI has enlisted 678 GPs and 262 LPs globally. Out of that total, only 42 GPs and 10 LPs (ex-Australia and New Zealand) are Asia-based. Particularly conspicuous in their absence are the large sovereign wealth funds, Government of Singapore Investment Corp and Temasek, which are leaders in private equity investment in Asia and active globally.
GPs and LPs who become signatories commit to applying core environmental, social and governance (ESG) principles in their business operations – principles that were developed by investors.
Some GPs and LPs may already have internal programs addressing social responsibility and may not see value in joining yet another initiative. But Chris Chia, managing partner at PRI signatory Kendall Court, says resistance tends to come from firms that simply don’t believe such principles can be effectively applied in Asia.
“It should be relatively easy from a technical standpoint, but from a cultural fit of wanting people to believe it, I think that can be quite challenging,” he says.
The single greatest obstacle to Asian private equity firms joining the PRI initiative is that they don’t need to, he says.
“[The firms] feel that they can get capital from investors that don’t require it, and they feel that they can invest in companies that don’t require it, either,” Chia said.
However, Shanghai-based Lunar Capital, also a PRI signatory, believes that the responsible investment principles make good business sense. As one example, founding partner Derek Sulger said Lunar Capital will often guide its portfolio companies on product safety issues. As part of the PRI, it is being socially responsible to the community they sell to. At the same time, it’s good business to build a trustworthy brand, especially considering how much emphasis Chinese consumers place on safety, Sulger said.
“If you look carefully at the principles, they are things you should be doing anyway to [generate returns],” he adds. “The PRI principles actually provide us with a philosophy and a framework that’s highly synergistic with what we want to do anyway.”
But perhaps the most powerful argument – also based squarely on business sense – is that GPs need to address investor concerns. LP pressure for responsible investing has been increasing on private equity firms worldwide. Bonnie Lo, partner and co-head of China business at NewQuest Capital Partners, admits that such pressure is coming, although more slowly in Asia compared to the West.
Kendall Court’s Chia thinks that it could possibly be decades before the PRI is embraced by the mainstream in Asia.