Study: PE firms adjusting to ESG

LPs are becoming increasingly vocal about the development of environmental and social governance programmes, and a recent BVCA report indicates that fund managers are listening.

Environmental and social governance considerations are playing a bigger role in private equity firms’ investment decisions, according to a recent study released by the British Private Equity and Venture Capital Association. 

The findings reflect the changing attitudes towards ESG programmes over the past two years. BVCA’s 2009 report on the subject found that many respondents were either indifferent or held negative views on ESG’s cost as well as its relevance to private equity investment strategies. 

Since then, many firms have adopted ESG in response to limited partners’ growing interest in the programmes. Over 55 percent of survey respondents indicated that they (or their co-workers) had responded to investor questionnaires focused on ESG issues within the past two years, according to the report. 

The report, which surveyed representatives from 79 private equity firms, found that 63 percent of respondents’ firms had implemented sustainability management policies for their investments, compared to just 24 percent in 2009. Only 20 percent indicated that they had no plans to implement similar policies, according to the report. 

A strong majority of survey respondents, 64 percent, agreed with the statement that management of sustainability standards made companies more attractive to potential investors, a marked increase from 2009 when only 44 percent agreed with the statement. Similarly, less than a quarter of respondents indicated that firms are ‘indifferent’ to companies’ sustainability programmes, compared to 38 percent in the previous study. 

Attitudes have also shifted in regards to the cost of ESG management, with 64 percent of respondents disagreeing with the notion that sustainability programmes lead to ‘unnecessary costs’ for companies, whereas only 37 percent disagreed in 2009. 

BVCA’s findings are consistent with a recent report from UK-headquartered buyout firm Doughty Hanson, the World Wildlife Fund and PricewaterhouseCoopers, which suggested that private equity groups are “particularly well placed to promote sustainable business practices through active management of their portfolio companies”. Firms that have developed expertise in environmental and social governance are likely to have achieved a significant competitive advantage over peers who have not, according to that report.  

In June, Kohlberg Kravis Roberts co-founder George Roberts described ESG as “more important than it ever has been” for the private equity industry at Private Equity International’s Responsible Investment Forum. KKR has implemented ESG programmes in around 25 percent of its portfolio, creating savings of around $160 million, according to Roberts.