Study: ESG offers competitive advantage

Private equity firms need to address ESG issues to create maximum value within their portfolios and meet LP expectations, a study by Doughty Hanson, the WWF and PwC has found.

The report from UK-headquartered buyout firm Doughty Hanson, the World Wildlife Fund and PricewaterhouseCoopers suggests private equity groups are “particularly well placed to promote sustainable business practices through active management of their portfolio companies”. 

Those firms which have developed expertise in environmental and social governance are likely to have achieved a significant competitive advantage over peers who have not done so, the report found.

Doughty formally launched the report this morning at the Institute of Directors in London, with British Private Equity and Venture Capital Association chief executive Mark Florman delivering a keynote address.

Commenting on the report, Hermes GPE chief executive Alan MacKay, said: “This study captures the dawning of a new enlightenment on ESG – it is not just about risks but equally about opportunities – and the best PE managers have awoken to this.”

Doughty has long championed the need for private equity firms to pay greater heed to sustainability and ESG issues. It appointed ESG specialist Adam Black from KPMG in 2008 as its head of sustainability. Black, interviewed by Private Equity International, said: “It was driven by the realisation that by addressing sustainability issues you can create further value in your portfolio. Good portfolio management should take ESG issues into account.”

“There are three aspects to sustainable investing – efficiency and cost savings: essentially producing more with less, cutting back on energy usage for example. Second is a very interesting aspect – the opportunity to tap into the ‘Green market’ for goods and services. Third, by paying attention to sustainability you can avoid costs such as fines and so on, manage risk, and avoid reputational damage,” Black said.

LPs are increasingly interested in ESG issues, with many having in-house ESG personnel and responsible investing criteria. A large majority of investors in Doughty Hanson’s funds were extremely supportive of the firm’s initiatives, with only a handful viewing ESG as a cost rather than an opportunity, Black said.

The report explains that ESG extends beyond the obvious environmental considerations to include human capital, product stewardship and supply chain management. It is also relevant throughout the life-cycle of an investment – not just at the pre-deal due diligence stage.

“The private equity industry is skilled at building better businesses and is therefore well placed to drive through the principles of sustainable investment into their portfolio companies,” Black said. 

“The report demonstrates how value creation requires increasing the operational efficiency of portfolio company operations – not solely in traditional financial terms, but also in terms of natural and human capital. Those firms that understand this will give themselves a long-term, competitive advantage.”

The report, entitled Private Equity and Responsible Investment: An Opportunity for Value Creation, can be found here.