Private Equity increasingly focused on meeting ESG and SDG goals

28 November 2016

As realities about the effects that companies have on the environment and society are coming to light, significant impetus for transformation of business practices in line with human rights and sustainability goals are afoot. Private equity firms, in a bid to improve the business case for their investments to a wider group of stakeholders, are paying considerably more attention to ESG, finds a new report.

The report, conducted by accounting and consulting firm PwC, explores the relationship that private equity (PE) firms have to environmental, social and governance (ESG). The report is based on a survey of 110+ private equity players, with 60% managing assets in excess of $1 billion.

Maturing approach to responsible investment

ESG maturity on the rise

The firm’s research finds that responsible investment has become increasingly important to PE firms, with around 70% of respondents having made a public commitment to invest responsibly, compared to 57% of respondents in 2013. Translating commitment into more concrete policies within the operation of the firm, too, has seen increases in recent years: from 55% to 83%. In addition, the firm found that of those without such a policy in place, three quarters are developing them.

Firms are also found to be investing more resources into the management of ESG: 78% said that they have dedicated some resources, compared to 62% in 2013. The resources also tend to be more closely tied to investor activity, rather than marketing or legal, with investor support involvement falling to 33% this year from 64% in 2013, while deal team involvement increased to 66%. 

The research also found that more and more key investment team members are expected to have formal Responsible Investment (RI) training, up from 29% in 2013 to 46% this year. Key training programmes remain absent at around half of surveyed companies however,

ESG management principles across the cycle

ESG increases in core relevance

The research further found that PE firms are increasingly vigilant regarding the ESG performance of potential targets. 40% of respondents note that poor ESG performance has led to a material discount in their valuation and/or led them not to invest in a company, while 41% say that they would be prepared to pay a premium for a target company due to its strong ESG performance.

The number of respondents actively screening companies on the ESG performance has increased in recent years, from 52% in 2013 to 60% in 2016. An increased number of respondents (77% vs. 59%) also say that it is mandatory to include ESG issues in their final investment committee papers. Screening companies for risks and opportunities related to ESG during the 100- or 180-day transformational plans drawn up following acquisition, is regularly included at 60% of respondents’ portfolio companies, up from 50% in 2013.

The firm notes however, that while firms are often keen to have clear due diligence on ESG as part of the acquisition process, few regularly include ESG issues in the programme on exit, at 38% in 2013 compared to 36% in 2013. 

What drives responsible investment?

The report finds that a move towards setting, tracking and meeting ESG targets stems from a wide range of sources. Investors remain a key area of influence, as cited by 17% of respondents; however, since the firm’s previous survey in 2013, risk management has increased from 36% of respondents to 44%. According to the firm’s analysis, the reason for the shift is partly the result of successful pressure from investors in the past, which have aligned their ESG goals – thereby reducing the need for such pressure.

Risk management has become considerably more important, jumping from 36% of respondents as the key factor, to 44%, while leveraging ESG as a means of driving operational efficiency/opportunity has fallen slightly, from 15% to 14%.

What keeps PE respondents up at night?

ESG risks

In terms of key risks faced by PE firms across their own operation, as well as that of their portfolios, cyber security comes out as the top concern – cited by 85% of respondents. Human rights concerns, related to portfolio companies, comes in second at 79% of respondents. Concrete actions to head off risks in the respective areas remains relatively low however at 27% and 48% respectively.

Climate risks to portfolio companies is an understood concern at the vast majority of companies (79%), while 75% see the carbon foot-print of portfolio companies as a concern. Gender imbalance at the PE firms themselves is seen as a concern by 64%, to which 44% respond that actions are being taken. 

PE firms moving towards SDG goals

Moving towards SDGs

The report finally notes that business practices are changing in light of the reality of environmental and social issues. The UN Sustainable Development Goals (SDGs) are being taken seriously by over a third of responding firms. 35% say that supporting SDG aligns with the firm’s investment thesis and culture, while 36% say that activity in the area creates reputational benefits. Around 30% say that alignment with the goals can create investment return opportunities. 

Support for goals includes the allocation of capital to investments that support SDG (19%), the monitoring of portfolio companies in line with SDG (16%) and engaging portfolio companies on responsible investment issues in line with SDG goals (32%).

The report also notes that attitudes about investment as such are changing at just under a third of respondent companies – respondents deem that responsible investment issues are as important, or more important than financial performance of the funds. According to the firm, the “point is an interesting one and a real sign of change in approach by the industry. Traditional business models are profit centric, but new business models, considering the needs of wider stakeholders in the mix, are now on the increase.”



Private equity firms ramp up sustainability focus

19 April 2019

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.