Recent years have seen significantly more emphasis placed on the responsible investment agenda within the private equity community. This agenda encourages investors to better evaluate the environmental, social and governance (ESG) implications of their decision-making, both in areas they directly control and also in areas over which they can exert a strong influence.
In the marketplace, ESG issues can have a real impact on business value and investment risk, and a well-founded approach to these issues can be a means by which private equity firms and portfolio companies can balance risks, create opportunities and, ultimately, differentiate themselves from their competitors.
Many private equity firms have already recognised the value of ESG initiatives not only in achieving environmental and social change, but also in reducing costs and minimising risks, and many already consider certain ESG issues during pre-acquisition due diligence, particularly compliance and potential ESG-related liabilities, while others are working towards a more structured and strategic approach under an overarching sustainability strategy, linked to the firm’s business strategy.
It has been widely recognised within the industry as a whole that implementing and maintaining ESG strategies during the investment and ownership periods can have a positive impact upon exit.
Although the market is still young and firm quantified data on the financial impact of strong ESG performance is not widely available, it is believed that a positive GP and portfolio company attitude towards ESG issues, translated into improved ESG performance, can result in higher exit prices.
The UN Principles of Responsible Investment (UNPRI) form private equity’s primary framework, providing a voluntary and aspirational structure for the incorporation of ESG considerations into investment decisions. Today, over 1000 asset owners and investment managers, including many BVCA members, are signatories to the UNPRI.