Better environmental, social and governance (ESG) management provides an opportunity for the private equity (PE) sector to generate more value – more value for their portfolio companies, for their investors and for society at large. We believe that not only is there clear benefit in better ESG management, but also that it is possible for the value to be quantified and communicated to investors, acquirers and wider stakeholders.
This year, we carried out the largest ever survey of the private equity industry’s attitude to ESG issues in the PwC Global PE Responsible Investment Survey 2013. More than 100 PE houses in 18 countries responded, managing more than $860 billion of assets.
The PwC Global PE Responsible Investment Survey reveals a belief that ESG issue management is valuable - whether it’s protecting value through managing risk, or generating value by spotting opportunities.
PE houses focus on a variety of ESG issues including, for example, pollution, eco-efficiency and resource scarcity, health and safety, anti-bribery and corruption measures, and human resource management. These initiatives can increase the value of the company eg. by generating incremental revenue from new technologies, improving productivity, increasing brand loyalty or reducing reputational risk. Across the industry, increasing effort is being made to understand ESG issues, reduce the associated risks and leverage ESG opportunities not only in portfolio companies, but through their supply chains too.
We found that ESG management activities are geared more towards risk rather than opportunity. Activity levels are high at acquisition with PE houses sensibly keen to identify potential problems – 71% of PE house participants include ESG issues in pre-acquisition due diligence.
But ESG activity levels reduce during the hold period with ultimately less than 15% measuring the difference they’ve made at exit. It means there’s much emphasis on monitoring and less on valuation.
This means the value-add of any performance improvement generated through investing in ESG issues is missed.
In the recent past the PE sector focused on due diligence (on health and safety issues alone) , but now this has expanded to all ESG issues. And many are now starting to want to link ESG issues to value creation. Even the most sophisticated PE houses see the challenge in understanding, quantifying and communicating the value that good ESG management can deliver, and we have developed the valuation methodologies to support them.
With investor interest expected to increase, this is one area in which PE houses can show they make a real and measurable difference.