Some quick online searching reveals a wealth of information about environmental, social and governance (ESG) policies and trends in the private equity sector. For instance, PE firms are increasingly considering ESG matters when making investment decisions, monitoring portfolio companies and measuring performance, value creation and impact.
What is an ESG policy exactly, and why would a PE firm want to have one?
The what – an ESG policy sets forth criteria for measuring a company’s performance with respect to various environmental, social and governance metrics. Thus, profit maximization on the investment is considered alongside matters such as the company’s environmental footprint, worker engagement, treatment of suppliers, community involvement and transparency toward customers and the public. In its ESG Considerations for Private Equity Firms report, PWC presents these considerations in the following infographic, which highlights that effective governance is central to the implementation of an effective ESG program.
The why – PE firms are increasingly aware of how ESG risks and opportunities factor into the following:
- Financial sustainability – measuring and improving ESG key performance indicators can drive long-term efficiencies and growth prior to exit.
- Investor interest – PE investors are becoming more focused on the social and environmental responsibility of their investments, as impact investors demand a measurable social and environmental impact along with financial returns (the Global Impact Investing Network’s 2016 report indicates that impact investing is a 15.2 billion dollar market, and is growing).
- Regulatory climate – U.S. disclosure requirements are measured by materiality, but as social and environmental sustainability considerations become more prevalent, disclosure requirements will likely evolve to include them.
- Competition – PE firms not thinking about ESG policies and social and environmental sustainability are behind the competitive curve.