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ESG (environmental, social and governance) investing is an approach to managing assets where investors incorporate ESG factors in their investment decisions, with a view to securing long term returns from their investment portfolio.
ESG investing aims to identify, evaluate and price ESG risks and the opportunities for value creation.
As part of the wider investment industry, the private equity (PE) sector drives progress in sustainable business practice through the provision of debt and equity, and by influencing Board level decision making. PE firms are realising that ESG offers a real business opportunity, which requires the integration of ESG considerations throughout the deal cycle.
For pure-industrial actors, ESG increasingly drives their mergers and acquisitions (M&A) agenda and the allocation of scarce capital and funding. The pace of change can require divesting traditional assets and businesses or acquiring activities that accelerate their transition towards a more sustainable business model.
In Europe, regulatory drivers are significantly influencing the sustainable investment market. The main developments include the EU Sustainable Finance Action Plan; the Corporate Sustainability Reporting Directive (CSRD); the Markets in Financial Instruments Directive 2 (MiFID II); and the EU Taxonomy Regulation.
ESG compliance (non-financial reporting, tax and legal aspects),greatly influences deal value. But responsible investing to build value goes way beyond compliance, with a range of ESG issues being increasingly central to strategic decisions. A 2022 global PwC investor survey reported that:
“Investors believe that the business terrain is shifting. Although inflation and the macroeconomic environment are today’s towering risk factors, investors see them abating over the next five years. The threat of climate risks is expected to increase over that time frame, along with threats related to cybersecurity. Innovation—investors’ number one priority—could help companies temper both cyber and climate risks, and even open up new market opportunities for fast movers.”
Investors are not only looking at sustainability objectives and KPIs. They want to know about companies’ specific ESG initiatives to create business value. Sustainability credentials, right across the company operations and practices, can create or erode value on an unprecedented scale.
“ESG credentials can create or erode value on an unprecedented scale.”
Environmental issues such as climate change, and regulatory compliance, are top of mind and a primary concern when it comes to ESG in deals. But issues around human rights, social justice and technology are becoming ever more important for investors. Indeed, investors increasingly expect ESG to be a core part of a company’s strategy – and they increasingly scrutinise companies’ ESG risks and opportunities. Key issues include:
Investor expectations are changing: financial institutions are increasingly committed to green financing and decarbonisation targets, aligning their portfolios to reflect and finance the low-carbon, climate-resilient economy. The sheer number of banks and other financial institutions signing up to global programmes – such as Climate Action 100+, the Net Zero Asset Owner Alliance (NZAOA), the Science-Based Targets initiative (SBTi) or the United Nations Collective Commitment to Climate Action (CCCA), for example – is testament to this commitment.
In simple terms, it translates into this: in the coming years it will be considerably easier to get financing for acquisitions that meet stringent ESG criteria than for those that don’t.
Established corporates see their current way of conducting business challenged by the need to transform fast to becoming sustainable and circular. Simultaneously, there is an increasing number of start-ups with new technologies and go-to-market approaches that are unproven.
The risks associated with novel ways of working and the expectation gap between founders and potential investors bolster corporate venturing (CV). CV allows companies to invest in innovation and integrate it into their business in a strategic way: this may entail setting up a venture building programme (i.e. building startups using their own ideas and resources), acquiring minority stakes in promising startups, or simply collaborate with them. It all comes down to actively participating in change, rather than just waiting for external factors to impact your company.
PwC supports companies in defining the right corporate venturing strategy and in implementing it.
Our core ESG services historically focused on compliance and risk mitigation pre and post deal. While we still offer these services, we are transitioning our core ESG offerings towards “Sustainable Value Creation” (SVC) and ultimately sustainable transformation.
Our SVC approach is designed for funds and PE firms that want their ESG programme to focus on value creation, as well as those who want to integrate ESG-linked value hypotheses into investment strategy and deal execution.
Mainstreaming the identification and management of ESG risks and impacts from the early stages of projects can help not just to improve compliance, but also to reduce project lifecycle delays and costs, and ultimately result in environmentally, socially, and economically resilient projects.
Our key strength is our multidisciplinary approach. We bring together all relevant experts in different fields, including amongst others: HR lawyers, tax professionals, corporate environmental lawyers, supply chain experts, sourcing and manufacturing specialists, and many more.
Choose from a wide variety of modules or a full package of services.