Study: Poor ESG can prevent deals

Many trade buyers would pull out of a deal with a private equity firm because of poor ESG performance, according to fresh research.

Poor performance in environmental, social and governance (ESG) issues at the portfolio company level could hamper an exit with a trade buyer, according to a recent study. 

The United Nations-backed Principles for Responsible Investment (PRI) commissioned PwC to survey 16 corporate buyers on their attitudes to evaluating ESG performance. The survey revealed that more than 80 percent of companies reduced the valuation of an acquisition target, or not gone ahead with a deal, because of bad ESG performance.

A number of respondents stated that the cost or difficulty of bringing the target up to its own ESG standards was one factor in this decision.

Conversely, a third of the respondents, which included Alliance Boots, Centrica, EDF and Xstrata, also found that good performance on ESG adds to the reputation and brand of a company.

“It’s becoming more and more relevant to the buyers. Which is why it becomes ever more important to the sellers to be able to tell the right story – and show the evidence in the data room – when trying to exit a company,” Phil Case, a director at PWC’s sustainability and climate change practice, told Private Equity International.

The ability to identify the value attached to managing ESG issues has been a holy grail for the private equity industry, he said. “I think this is the start of a growing realisation that, at the very least, if you don’t do a good job at it, value is at risk”.

The PRI is a network of international investors working to put the principles of responsible investment into practice. The principles provide a voluntary framework that helps investors incorporate ESG into their decision-making.

Matthieu Favas contributed to this report.