In early 2020, three LPs spelled out the consequences managers could face if they failed to take sustainability seriously. “Asset managers that only focus on short-term, explicitly financial measures, and ignore longer term sustainability-related risks and opportunities are not attractive partners for us,” wrote Japan’s Government Pension Investment Fund, the UK’s USS Investment Management and California State Teachers’ Retirement System in a joint statement.
From LP commitments to reputational risk, much has been said about the potential negative consequences of overlooking environmental, social and governance issues; less attention has been paid to the upsides of embracing it.
A recent report from PwC – Global Private Equity Responsible Investment Survey 2021– highlights how private equity firms are using ESG to create value and outlines the opportunities they can capture through doing so. “PE firms putting ESG at the heart of their business strategy will be the game-changers in the new sustainable economy,” the report notes.
According to the survey, 66 percent of GPs rank value creation as one of their top three drivers of responsible investing or ESG activity, and more than seven in 10 integrate ESG risks and opportunities into their value-creation plans.
The growing emphasis on ESG as a value-creation lever is due in part to the increasing weight it holds for portfolio company staff and customers. As Christophe de Vusser, a partner at Bain & Company, told us in May: “What we see is that consumers are starting to shift behaviours because of ESG. They start to buy from company A not company B because of ESG.”
These considerations can also be seen in some of the mega-trends shaping demand, such as the circular economy and emerging technologies. Ensuring companies are well-positioned to benefit from these trends could help generate value.
The PwC report notes: “Leaders should ascertain whether there’s an opportunity to align the business with the sustainable transition that could form part of the investment thesis and truly unlock potential sustainable value creation. If ignored, sustainability issues can erode value, hinder growth and block access to finance. Conversely, if addressed properly, they can drive value creation across the spectrum.”
To achieve this, however, firms will need to recruit the right talent to deliver sustainable value creation, PwC adds.
Indeed, competition for ESG talent is on the up. In early May, New Private Markets – our affiliate title that focuses on sustainability, ESG and impact investing across private equity, real estate, infrastructure and debt – reported that Blackstone’s global head of ESG, Alison Fenton-Willock, had moved to KKR where she will be a director on the ESG team. It is also perhaps a sign of its mounting importance in private markets that two ESG heads were included in PEI’s 40 under 40: Future Leaders of Private Equity list this year – PAI Partners’ Cornelia Gomez and Partners Group’s Carmela Mondino.
Investors’ conviction on the future importance of ESG appears relatively clear – half of respondents to bfinance’s ESG Asset Owner Survey strongly agree that ESG integration will contribute to outperformance in private equity over the next 20 years.
We’ll be keeping an eye on how managers most effectively use ESG as a lever to deliver this outperformance. In the meantime, PEI’s Operational Excellence Awards 2021 – which are now accepting entries – may give some indication of the role it is playing in value-creation plans and its impact on exit multiples.