A recent PricewaterhouseCoopers survey found that private equity investors and managers increasingly include environmental, social, and governance (ESG) factors in their decision-making.
The Global Private Equity Responsible Investment Survey 2021 found that 65 percent of survey respondents have developed a responsible investing or ESG policy, as well as the necessary tools for its implementation.
“Over the past seven years, private equity firms have radically reassessed the importance and value of ESG to their business,” the report noted. “It has gone from being considered a tangential area of compliance, or a specialist product for a small minority of investors, to becoming an overarching framework that is informing the strategic thinking of the entire firm.”
As a result, 72 percent of the respondents said that they always screen target companies for ESG risks and opportunities at the pre-acquisition stage. Meanwhile, 56 percent discuss ESG as part of the executive board agenda more than once a year, while 15 percent discuss it at all board meetings. This was an impressive increase from 2019, when these figures were 35 percent and 6 percent, respectively.
“What we’re seeing is that risk-management is no longer the primary driver of ESG activity,” said Nicky Crawford, director at PwC, U.K. “This is a shift, from as recently as 2019. Private equity is now taking a proactive approach, placing a premium on value creation through ESG.”
She pointed out that this development has been seen across a multitude of sectors, driving consumer preferences, investment decisions, and investment strategies: “Firms do not want to miss out on value-creation opportunities that are offered by ESG integration and by aligning with major sustainability trends.”
The survey referred to sustainability trends such as the circular economy, inclusion in the workforce, net-zero carbon emission goals, innovation in the climate sphere, and nature-based solutions to create change. This has been happening, among other sectors, in the food, fashion, and transportation sectors.
The survey also found that this shift from risk mitigation to value creation through ESG has also come about because managing partners now realize that ESG offers a real business opportunity, in addition to other levers such as digitization and internationalization.
Nearly three out of five (56 percent) firms said that they either refused to enter into a contract with a general partner or turned down a potential investment based on ESG issues. More than half of the respondents also said that the final decision for responsible investing lies with the general partners of the firms, more so than with their allocated ESG teams.
So, what are the ultimate drivers of ESG success in private equity firms?
The PwC survey concluded that significant work still lies ahead for private equity firms. While long-standing governance issues or those mandated by regulation see the smallest gap between concerns and actions being taken, those that are quickly coming to the forefront in the post-pandemic world still need to be addressed in a major way.
For example, occupational health and safety, avoidance of bribery and corruption, and compliance with ESG regulation see the smallest gaps between concern and action, in the ballpark of 10 to 15 percent. Meanwhile, goals to minimize carbon footprint, mitigate climate risk, achieve net-zero emissions, as well as streamline work automation and emerging technologies have large gaps of 40 to 60 percent.
The survey concluded that ESG issues will reshape the global economy, the private equity sector as well as the whole financial industry. “So it’s crucial for private equity firms to incorporate responsible investing and ESG into their general business strategy and no longer consider it as a side issue or specialist offering,” said the report.