Environmental, Social, and Governance (ESG) Programs in Private Equity: Strengthening Reputation, Attracting New Investors, Satisfying Existing LPs, and Mitigating Deal Risk

By: Bruce Martin

Institutional investors and other stakeholders are becoming increasingly aware of the environmental, social and governance (ESG) credentials of the private equity firms with which they invest.  As the awareness and importance of ESG concerns grow, private equity firms are finding that attention to ESG performance can provide a “core value-creation strategy at private equity funds in portfolio companies,” according to a study published earlier this year by the Coller Institute of Private Equity at the London Business School.

The Value of ESG in Private Equity

How can incorporating an ESG program be beneficial for a private equity firm?

1. It can strengthen reputation, attract new investors, and satisfy existing limited partners.

According to Pitchbook’s 2015 PE ESG Survey, institutional investors are increasingly preferring private equity firms with strong ESG programs, even over “ESG-less” firms who generate better returns. Indeed, many Limited Partners are large pension funds and universities who are interested in maintaining a certain risk-adverse image. Correspondingly, they want to align their investment interests with their brand identity. Private Equity firms can use ESG programs as a marketing tool to enhance their reputation to attract additional LPs, while also satisfying the reporting requirements of existing LPs.

2. It can help mitigate ESG risk and increase ROI across all phases of a deal. An increasingly competitive market and higher valuations means private equity firms cannot afford to miss anything during due diligence. As US businesses gradually become more and more global, there are a wider range of ESG risks that need to be assessed. Even before a letter of intent (LOI) is executed, potential material ESG risks associated with a target opportunity can be evaluated so acquirers can be completely informed during negotiations.

During ownership, costs can be reduced using ESG principles by pinpointing areas where resource spend (e.g., energy, water) can be decreased and improved. In addition, preventative measures can be put in place so buyers can avoid ongoing ESG risks such as environmental liabilities, employee health and safety issues, social and labor issues, and supply chain compliance, to name a few. Furthermore, portfolio companies can reach a larger customer base as US consumers become more interested in sustainable products and practices.

Finally, having a strong ESG program in place allows private equity firms to communicate the proactive ESG risk-mitigating processes they have implemented over their holding period enabling them to negotiate a premium upon divestiture. This is especially beneficial when selling to a public company that may already have ESG reporting requirements in place.

 A Tool for Evaluating ESG

In December 2012, the Environmental Defense Fund (EDF), in association with leading private equity firms, released a management tool to measure and evaluate ESG performance in the private equity sector.  ESG is a term used by investors to describe how they evaluate non-financial performance indicators.  Growing interest in ESG matters by investors reflects the view that environmental, social and corporate governance issues can directly affect financial performance. According to Pitchbook’s 2015 PE ESG Survey, the number of respondents who indicated their firm is currently developing an ESG program has steadily grown from 8 percent in 2012 to 20 percent in 2014.

What is the ESG Tool?

The ESG management tool provides a framework for private equity firms to assess and improve ESG management across their portfolio companies.  For example, users of the tool can evaluate performance in areas such as access to ESG resources, integration of ESG management into the investment process and portfolio company operations, and measure and report results.  The broader framework assesses performance across four categories:  leadership, management, investment process and reporting results.The ESG management tool gives users a detailed analysis of the firm’s practices and a menu of strategic initiatives to consider.

The outputs from the tool can be used in several ways by general partners (GPs), limited partners (LPs), and others, for example:

  1. GPs can use the tool to evaluate their performance and develop a prioritized action plan for improvement and risk mitigation within their portfolio.
  2. LPs can ask GPs to perform a self-assessment and discuss with them the actions the firm plans to take based on the results.
  3. Consultants can use the tool to develop specific recommendations for improvement with their private equity clients.

EDF’s ESG Management Tool is a resource for private equity firms to make measuring and managing ESG performance a standard practice for value creation across their funds.

How Can an ESG Tool be used?

For additional information on the ESG Management Tool or the ways in which EHS Support can assist Private Equity firms with ESG management, contact Bruce Martin.

Bruce MartinABOUT THE AUTHOR As a certified professional environmental auditor (CPEA), Bruce Martin has 23 years of varied experience in environmental management consulting, including environmental, health and safety auditing; merger and acquisition environmental due diligence; environmental management systems; site assessments, training, and environmental investigations… Read More



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