The importance of an ESG strategy for private equity

The integration of ESG issues within strategies is becoming a key challenge for private equity firms facing regulatory pressure at the dawn of mandatory sustainability reporting. These new challenges are affecting all the layers of private equity firms including the portfolio company, its products as well as the fund.  

With ESG moving up the agenda, private equity managers have reassessed the importance and the value of ESG to their business.

According to a survey done by PwC in May 2021* on private equity firms, 

  • 65% of survey respondents have developed a responsible investing or ESG policy as well as the tools to implement it.
  • 72% always screen target companies for ESG risks and opportunities at the pre-acquisition stage.
  • 38% have identified United Nations' Sustainable Development Goals (SDGs) that are relevant at a company portfolio level.
  • 66% of survey respondents rank value creation as one of their top three drivers of responsible investing or ESG activity.
  • 49% say they integrate highly material ESG issues into commercial due diligence when making investment decisions, albeit on an ad hoc basis.
  • >7 in 10 say they integrate ESG risks and opportunities into their transformation or value creation plan.

ESG as a driver of value creation 

Private equity firms have understood the urgent need to be proactive by adjusting their strategy and commitments and to embed ESG issues not only in the short term but in their long-term value narrative. ESG, or sustainability reporting as it was done up to now, as a marketing tool is not enough anymore. 

Reportings were mainly used to showcase mandatory ESG or Sustainability actions for their shareholders and voluntary communication for their stakeholders. But this new agenda, enforced by regulators, investors and stakeholders and the recent crisis of Covid 19 or the one we are currently living in today with the war in Ukraine pushed private equity firms to acknowledge ESG as a driver of value creation and to urgently develop a proactive ESG mindset.  

Risks-adjust return and a future-proof business model

Private equity firms have moved from shareholder capitalism to stakeholder capitalism. 

PE firms have understood their key role in reaching the Paris Agreement Goals set up by 192 countries to limit global warming to 1.5 degrees Celsius.

They have realised that they can create value in a meaningful and sustainable way by looking to progress their ESG focus to a more long-term value approach. 

A strategy at all levels of the decision-making process

When a private equity firm wants to develop an ESG strategy, there are different elements to consider. The first step is certainly to identify the key material ESG-related risks and opportunities from the big picture to the specific portfolio ESG risks and opportunities. The considerations of ESG issues will not only help them define their risks-adjusted returns and a competitive edge but to design a sustainable future-proof business model to improve long-term financials while impacting positively the people and the planet. 

The materiality assessment is the best way to identify and assess the sustainability risks along the global value chain and processes an organisation is exposed to, as well as the organisation’s social and environmental impacts. This will allow a firm to implement the key identified material sustainability issues in the management process (e.g governance, policies, investment process and risk management). The last piece of the management process being, precisely, the reporting exercise and the communication-related actions that will unfold.

Addressing sustainability risks through materiality assessments to be integrated in a strategic risk management process will definitely benefit not only your stakeholder’s value but also the planet and people, your business and your reputation.The integration of sustainability risks into the global organisation management process will help mainstream finance reach the objectives of the EU Agenda for Sustainable Finance which are to solve the challenge of our time by reorienting financial flows towards sustainability goals.

This underlines the importance for PE firms to develop and integrate the new strategy at all levels of the decision making process from the corporate to the investment process, from sourcing to the exit.

The firms that chose to implement a robust strategy will certainly be better positioned in the face of the upcoming requirements in terms of reporting and compliance but also better positioned to face the upcoming challenges. Private equity firms putting ESG at the heart of their business strategy will be game changers in the new sustainable economy by creating value for their investors, society and the planet. 


Contact us

Frédéric Vonner

Advisory Partner, Sustainable Finance & Sustainability Leader, PwC Luxembourg

Tel: +352 49 48 48 4173

Andrew McDowell

Strategy& Partner, PwC Luxembourg

Tel: +352 49 48 48 2034

Julien Melotte

Audit Partner, Industry & Public Sector, Sustainability, PwC Luxembourg

Tel: +352 49 48 48 5287