Environmental, Social and Governance (ESG) has become a key strategic priority for private equity firms in the last few years. So, what has changed and why this dramatic increase in focus on ESG?
Public listed companies in northern Europe have been working with ESG for some years, where client demand and market response often left the regulator trying to catch up, but Private Equity has been much slower to respond. With thorough reporting structures already in place the addition of reporting on ESG for public companies was not a significant addition. For private firms, clients were reluctant to burden them with other objectives, distracting them from core investment goals.
Private equity also has had a fragile experience with investments in renewables and positive impact companies in the past, for example, many of the solar technologies that were fashionable as investment vehicles 20 years ago failed.
Investment managers from private markets will often have the same clients and regulators as their public market associates and so there has been a coming together of thinking and experience in recent years.
There is now though a recognition from clients who want to be able to evaluate the impact of all their investments, regardless of whether they are public or private and this has led in turn to regulation on ESG activity, increasing its importance. Private equity firms that integrate ESG into their investment process can differentiate themselves in an ultra-competitive market.
ESG can now also have a huge reputational and brand impact on a company which can obviously be directly linked to its financial performance, with ESG driving private equity to identify investment opportunities that have the potential to generate long-term value.
In private equity there is also the ‘ownership’ issue whereby investors can have a genuine impact on making a change where engagement across a range of metrics can make a real difference.
The very real topic of climate change and the corporate world’s transition to a net zero model has also crystalised ESG investment thinking, coupled with world events such as the war in Ukraine which has highlighted the negativity of the over reliance on carbon.
It’s clear then that a considerable change has taken place, with private equity investors using ESG considerations to make informed decisions, manage risk and align their investments with their personal values and societal concerns.