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Private equity and the responsible investment journey

Our research shows that the Private Equity industry sees there is a clear business case for responsible investment – embedding the effective management of ESG issues in portfolio companies and believing in the value derived

Being open about investing responsibly

Private Equity (PE) companies (those investing in and purchasing businesses) are becoming more vocal on responsible investment issues. More than two-thirds (70%) of respondents to this year’s survey have made a public commitment to invest  responsibly (up from 57% of respondents in 2013).

At the same time, we have seen a marked uptick in the number of PE houses with responsible investment policies (up from 55% to 68%).  In fact, according to our survey, an impressive 96% of the PE community have or will shortly have an responsible investment policy. This means more firms are formally setting out their investment ethos, including what sectors are excluded from investment on moral or ethical grounds, how they expect portfolio companies to address ESG issues, how ESG is incorporated into their investment processes, and how they plan to report on ESG.

Making a public commitment to invest responsibly
signs of a maturing approach to ESG management

Signs of a maturing approach to ESG management

We’re seeing definite signs that the PE community is moving towards maturity in its approach to responsible investment. Based on our research in 2013 and 2016, and extensive market experience, we’ve mapped out the direction of travel and identified the signs of change:

  • strong governance and trained resources
  • robust responsible investment policy in place and the right tools to support it
  • integrating ESG management throughout the deal cycle – from screening targets through to exit
  • regular formal monitoring and reporting
  • putting a value on ESG performance
  • reflecting ESG performance in investment decisions and pricing
  • engaging investors
  • reporting publically

For many PE houses it’s becoming part of core business behaviour. 

Embedding ESG management in the deals process

PE houses look at responsible investment through lens of environmental, social and governance (ESG) risks.  Pre-acquisition, they’re looking out for the red flag events that will create additional costs, fines or reputational damage further down the line. Managing ESG issues is becoming a mainstream activity carried out by the deals team.  It is viewed by many as one of the drivers of price – good ESG management commanding a higher premium and poor ESG management demanding a discount.

Post purchase, the focus switches to reporting on progress as changes and improvements are made. There’s a strong financial business case at acquisition to integrate responsible investment thinking, but there are other drivers too including risk management, stakeholder pressure, and operational efficiency. ESG management is defining what’s acquired, the price commanded and what happens next i.e. what interventions are required to reduce risks and improve performance, and what’s reported too.

Informing decision making
What's keeping you awake at night?

Horizon scanning – risks and agendas

Any business faces the challenge of identifying risks at speed to remove or reduce their impact on the bottom line. PE houses are no exception. Buying, selling and investing in companies means they have to have insight across a broader range of factors. There’s a need to understand the risks that impact upon not only their direct business and market, but also those of their individual portfolio companies.

Cyber security is top of their risk agenda closely followed by human rights and climate risks.  Surprisingly, recognition of risk is far higher than action to mitigate them – less than half have plans in place to reduce their risk exposure.

PE houses are horizon scanning and there is strong awareness of what’s on the government agenda too. Many have already started to consider how the Sustainable Development Goals (the UN goals tackling 17 major world issues agreed by 193 governments) will impact them with 44% planning to assess their impact and 36% recognising there is reputational benefit in supporting them.

Contact us

Phil Case
Private Equity Sector Lead for Responsible Investment
Tel: +44 207 212 4166
Email

Sylvain Lambert
Partner and Sustainability Lead
Tel: +33 15657 8083
Email

Lauren Kelley Koopman
Director, Sustainable Business Services
Tel: 001 646 696 0374
Email

Emilie Bobin
Director, Sustainability
Tel: + 33 156578660
Email

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