Embedding ESG into Private Equity
A well-defined and robust environmental, social, and governance (ESG) strategy can help a private equity firms’ de-risk and drive value throughout the fund lifecycle.
Drawing on our decade long heritage of working with private equity funds and their portfolio companies, we have outlined some of crucial factors for successful ESG integration.
As a first step, we would suggest that private equity firms should assess their current environmental, social, and governance capabilities to develop an actionable and flexible plan for driving sustainable growth.
Data, Data, Data
Most PE funds will have to provide stringent monitoring of their fund’s performance, so it is a good place to start. Knowing where you are on non-financial data sets can provide a good ground for providing insight into your current ESG position and the areas that need to improve.
Using an ESG framework as an additional perspective for identifying risks and value creation opportunities is undoubtedly becoming mainstream in private equity around the world. Ensuring these processes are auditable and being used in the right way is essential to avoid green washing.
It is crucial that investment teams have access to ESG and sustainability expertise with experience and knowledge about financial markets in general and private equity specifically. It is imperative that the right expertise is used to develop a robust strategic ESG approach. We have witnessed a rise in financial services receiving huge fines for greenwashing because they haven’t had the right teams supporting them in driving the agenda forward.
ESG Transformation in PE firms are usually complex and involve investment, which may impact short-term profits. It’s important that shareholders and management are aligned for the duration of the transformation.
The World Economic Forum identifies the challenges that might occur – although rarely do transformations run to plan as they are often impacted by the market and competitive dynamics. Quality management will counter these forces by adjusting their plans and efforts, thereby achieving longer-term goals albeit with shorter-term volatility.
Private equity shareholders, being fewer and closer to management, can understand better such volatility and support mid-course corrections.
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