Calista Sourcing Club

The importance of an ESG strategy for private equity.

February 15, 2022

Oriane is a director in PwC's "Strategy&" business, providing thought leadership and C-suite strategy advice on sustainable finance and ESG strategy for clients in financial services, corporations, SME’s and the public sector across the PwC network. Prior to joining PwC, Oriane has developed a tool for ESG due diligence and risk assessment for private equity firms and their portfolio companies.

The key challenges for private equity firms  

The integration of ESG issues  within strategies are becoming key challenges for private equity firms facing regulatory pressure under the SFDR, Taxonomy, AIFMD, MiFID, … and being at the dawn of a mandatory sustainable reporting (CSRD). These new challenges are affecting all the layers of private equity firms including the portfolio company and its product, and  the fund as well.  

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 and 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 on the short term but in their long-term value narrative. ESG reporting is not enough anymore.

Up to now, they were mainly used to showcasing mandatory ESG or Sustainability reporting for their shareholders and voluntary reporting for their stakeholders. But this new agenda enforced by regulators, investors and stakeholders and the recent crisis 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 defining their risks adjusted returns and a competitive edge but designing a sustainable future-proof business model to improve long-term financials while impacting positively the people and the planet.

This underlines the importance for PE firms to develop and  integrate the new strategy at all levels of the decision marking 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.


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