Chasing "inclusive growth": How environmental, social and governance (ESG) factors are impacting the private equity industry

Businesses operate within a multifaceted ecosystem comprising stakeholders that are increasingly demanding of accountability and transparency. More and more firms are becoming aware of the fact that business needs to transform in order to suit the needs of the changing world. 

Growth is not just a profit footprint anymore but is measured against parameters that affect the society as a whole. Stakeholders, today, are more than ever interested in how and whether companies are capable of generating this "good growth", which takes into consideration environmental, social, economic and fiscal impacts.

Private Equity (PE) firms have a major role to play in spearheading this movement. In 2017 the PE industry had assets under management (AUM) of $2.83 trillion and private equity fund raising reached its highest ever amount at $453 billion*. The size alone of the global PE industry and its operating model (longer holding periods, involvement in corporate governance are both catalyst to realising ESG benefits) mean that there is an untapped sector for responsible investment and creating “good growth” while increasing financial return.

During the 21st Private Equity Forum held by PwC Luxembourg on 5 June 2018, fund managers and sustainable finance experts discussed how ESG is affecting the PE industry.

ESG integration into PE processes

Pressure from investors has been the premium driving force behind the adoption of ESG modules into PE processes. Investors are not only aware of the fact that environmental and social issues are at the forefront of political agendas but are also driven by the prospect of higher financial returns. Most (86% in 2016)** take into account ESG factors before making new investments.

The regulatory angle

The financial crisis has also played a role in this wherein a series of regulations affecting banks, insurers and investment funds have entered into force to increase both transparency in reporting and monitoring of investments. Investors are thus seeking to invest in funds with the aim not only to achieve a financial return but also to generate measurable social and environmental benefits.

ESG for profit? You heard that right

Many fund managers still get cold feet or find the practicalities of integrating ESG factors into the PE core processes overwhelming. For some, it’s also perceived as an additional cost upfront for a benefit that’s not immediately visible. Although, this is true, ESG is also an opportunity for PE firms. Studies show that responsible investments are a catalyst towards higher financial returns.

A 2015 Harvard Business School research, which examined implications of sustainable investments, came to the conclusion that, “firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues, suggesting that (such) investments are shareholder-value enhancing.”

Sound ESG management also leads to lower risk. According to a 2016 PwC survey of private investment, a growing number of PE firms are now integrating ESG principles while screening investments, monitoring and reporting and have cited risk management in the core processes as an important driving factor. For example, ESG issues play a major role in managing risk in investment portfolios. Irresponsible or unethical investment decision making can lead to environmental or social challenges, which in turn can cause poor investment performance.

Whatever is worth doing, it’s worth doing well

Environmental, social or fiscal issues and business aren’t two separate entities. As the world fights for a sustainable future, for its existence really, taking responsible business decisions no longer seems to be an option. Industry regulated or not, peer pressure or not, growth of a business, today, needs to be inclusive, for it to be lasting in a resource-constrained planet. As Ashraf Ammar, Director at PwC Luxembourg, said, "ESG is more than mere principles. It’s a mind-set. It’s about being accountable and doing the "right thing".


*Source: 2018 Preqin Global Private Equity and Venture Capital report
**Source: Preqin Investor Outlook H2 2106: Alternative Assets

Contact us

Benjamin Gauthier

Partner, PwC Luxembourg

Tel: +352 49 48 48 4137

Ashraf Ammar

Director, PwC Luxembourg

Tel: +352 49 48 48 3636

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