PE BROADCAST: ESG – friend or foe for PE?

The business world is awash with conversations around ESG. For Private Equity the prospect of additional regulation, compliance and stakeholder scrutiny is often unwelcome, seen as a hindrance on value creation and hampering transformation efforts. So, with ESG likely to be part of the commercial context for years to what does it mean for PE firms? What opportunities does it present? What are the risks?

Investors / Top 20 Institutional Investors are committing large parts of their funds to ESG investments - 80% in EU, 45% US, 55% Asia. If only a small percentage of a fund is non-ESG compliant, there is a risk in the ability to raise funds. And it’s not just investors and shareholders who feel strongly about this…

According to a recent Forbes article

68% of employees think sustainability is crucial and 48% would do so for less money. The same article reported that 54% of consumers would pay a premium for brands that are sustainable and environmentally responsible, and that customers want to interact with brands that they know are ethical and socially aware

If we start to unpick this it bodes well for Private Equity. In our latest PE Broadcast we discuss how PE firms can prosper in the post-pandemic, socially-conscious world that’s emerging.

Across the deal cycle there are considerable opportunities (and some risks) for Private Equity. In Due Diligence, where ESG factors should be woven into the investment thesis and afforded the same attention other business factors receive. Throughout the hold of the asset any transformation efforts need to consider ESG in the most complete way. And, at Exit, failure to have address ESG issues will devalue the asset (particularly if the exit route is an IPO where the regulations of the listed market will be brought to bear on the business).

This will continue to evolve as a topic and it’s clear there’s much PE can do to get ahead of some of the challenges. What’s particularly fascinating is that embracing ESG offers genuine opportunities for considerable value creation and multiples on exit. It’s certainly a topic to keep an eye on and one we will no doubt revisit soon.