The events over recent months have served as a wake up call for governments, businesses and individuals alike, where it has become clear that in order to prevent further pandemics, reduce the risks of climate change, build a more equitable society and still generate growth, we need to create more sustainable economies and systems.
Businesses all over the world are adapting to move environmental, social and governance (ESG) issues from the periphery of strategic concern to the centre. To this end, sustainable investments, being a category of investments where ESG considerations are an overlay to the pursuit of financial performance, and socially responsible investments (RI), being investments that are based on ethical considerations, have continued to grow in recent years. Today, ESG is a key driver of value creation for all sectors and the story for Private Equity (PE) is no different, as PwC’s latest Global Private Equity Responsible Investment Survey demonstrates. Findings from the survey show that:
Entering the age of maturity
The attitude and approach of PE firms has matured in many important areas, including how they value ESG performance; how ESG influences investment decisions, enterprise value and/or multiple; and engagement with investors and public reporting.
This new maturity is driven by several factors. In the broader financial services sector, there has been a marked improvement in the performance of ESG-focused funds, as investors have changed their own ethical standards and become more demanding, and have also considered the financial impact of factors such as consumers’ shift to more sustainable products, potential new ESG regulations, and the reputational influence (negative or positive) of diversity and inclusion policies.
Survey findings also show how ESG is commanding more attention at the board level, where 56% of respondents noted how ESG features in board meetings more than once a year, and 15% said it was discussed at all board meetings. That represents a substantial increase from 2019, when 35% of respondents said ESG featured in board meetings more than once a year, and only 6% said it was on the agenda at every meeting.
This figure will surely continue to increase as more firms align their investment strategies to the push to decarbonise global economies, make their businesses and supply chains resilient to disruption from climate change or future pandemics, develop more inclusive workforces, and recognise that sustainability (and purpose) is important to attracting and retaining talent. The growing movement to link executive pay to ESG performance also will help focus the attention of the board.
Creating value for investors and society
Up until recently, risk management was the biggest driver of ESG activity, but results from this year’s survey reveal how respondents are putting a premium on value creation instead. Although this was the first year that value creation was among the possible answers, the fact that respondents picked it as their top driver of ESG activity shows that PE firms are embracing a far more proactive ESG mindset. Major sustainability trends such as the circular economy, net zero, inclusive recruitment, climate technology and nature-based solutions are disrupting the status quo (and hence creating investment opportunities) throughout the business world.
Another reason for this shift from risk mitigation to value creation could be that managing partners have come to realise that ESG offers a real business opportunity, and they don’t want their firms to miss out. There’s an increased recognition among these leaders of the value creation opportunities that arise from aligning a business with the transition to sustainability, and there’s acknowledgement that ESG is a lever for transformation, alongside other levers such as digitisation and internationalisation. Notably, more than half of all respondents (56%) have either refused to enter an agreement with a general partner or turned down a potential investment on ESG grounds.
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