Unlocking value: The imperative of ESG in private equity investments and operations

The private equity (PE) industry now routinely considers environmental, social, and governance (ESG) issues when evaluating prospective acquisitions and making deals. The ESG label has become a political issue—particularly in North America—but industry leaders recognize that companies with strong governance, openness to the best talent, and environmentally efficient processes—whatever label you give those matters—are good prospects, and industry leaders have been acting accordingly.

Value creation is always the number one priority in PE. It’s no surprise that industry executives examine environmental, social, and governance practices primarily to see if they can find value in them. Short answer: they do. Environmental policies reduce operating costs; social practices attract talent; governance processes reduce risk. The components of ESG make for better deals and better operations.

At the same time, however, there’s plenty of opportunity to do better. The industry pays more attention to ESG in dealmaking than in operations. Alignment between PE firms and portfolio companies (portcos) is often lacking or incomplete, and portcos are generally less certain that ESG creates value than investors are. While PE firms and portcos have processes in place to discuss and manage ESG, most of them have not set specific ESG goals, incentives, or reporting standards. The value that industry leaders already see from ESG actions makes it possible to imagine that much more value could be created—for investors, companies, and society—if the PE industry challenged itself and supported those actions’ efforts with data and accountability.

  • KEY FINDING #1: ESG is becoming ingrained in the due diligence and dealmaking processes.
  • KEY FINDING #2: Leaders in the industry see a clear relationship between ESG and value creation.
  • KEY FINDING #3: Portcos and PE firms are only partly aligned about ESG, with portcos generally more skeptical of ESG’s value.
  • KEY FINDING #4: Good intentions are not matched by good reporting and operational practices.

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