Driving stakeholder value with ESG
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In today’s world, environmental, social, and governance (ESG) is a core pillar of value creation for businesses. Due to an evolving set of expectations from stakeholders and pending regulatory requirements, ESG is no longer a discussion—it’s a necessity.
For private equity (PE) firms, it is important to be aware of the ESG issues specific to the industries represented in their portfolios, especially the level of regulatory compliance required to effectively manage risk across the investment portfolio.
ESG trends in private equity
Every industry has different driving forces behind its consideration and development of ESG programs. The following trends are particularly important to private equity.
According to a PE survey of 200 U.S. private equity fund managers, 94% said their limited partners insisted on incorporating ESG criteria into their investment strategies as it boosts investment performance and drives long-term profitability1.
1. https://insights.bdo.com/spring-pe-pulse-survey.html
1. https://insights.bdo.com/spring-pe-pulse-survey.html
Private equity firms are choosing not to invest in an organization if ESG risks, including climate risks, are not effectively managed and reported.
For existing portfolios, it is important for audit companies to identify emerging ESG issues that require mitigation, as well as opportunities to create value at the portfolio company level through the execution of a carefully considered ESG strategy.
PE firms are incorporating ESG into the due diligence and evaluation process for acquisitions. It is becoming paramount to understand the potential risks and impacts on returns before an investment is made.
Upcoming regulation will require that public companies disclose and report on their Scope 1, 2, and 3 greenhouse gas (GHG) emissions, which will put pressure on value chain suppliers, many of which are PE firm portfolio companies, to map out their carbon footprints and meet compliance requirements.
As the need to track ESG data grows, PE firms will need to drive the adoption of tracking and monitoring technologies across their portfolio companies for sustainability reporting, risk modelling, and scenario analysis.
Investing in an ESG program is more important now than ever. Private equity firms need to be aware of the increased pressure to measure and report on ESG metrics and demonstrate impact on issues that matter. Forming an effective, sustainable ESG strategy and leveraging technology to support your ESG journey will optimize growth and set your organization up for long-term success.
Benefits of investing in ESG programs for private equity
Increases valuation at exit
Builds trust and connection through the investment lifecycle
Identifies emerging opportunities
Supports data-driven decision making
Aligns with evolving stakeholder values
Manages risk and optimizes return