Strike ESG investment in Private Equity while the iron is hot

The ESG wave is fast approaching

Public awareness of ESG related risks, major societal shifts and rising regulatory scrutiny all stress the immediate need for the Private Equity sector to anticipate this new reality and step-up their strategic measures in order to change along with the times, for the benefit of their investors and the wider community.

Catalysts that are driving sustained growth of environmental, social and governance

The push for sustainable business practices is increasingly driving corporate decision making on a global scale, and the Private Equity (PE) sector has a pivotal role to play. Not least as the expectations on businesses to be transparent about their ways of working are greater than ever before. In the face of a rigid and ever-changing regulatory landscape, organisations that have unsustainable practices will be disadvantaged. Moreover, a wealth of research has proved that ESG-aligned assets outperform non-ESG products and that hence it’s not a tradeoff between sustainability and performance. This is reinforced by the demands of a new generation of investors who prioritise sustainable impact alongside financial results. 

The growing public awareness of ESG related risks has put sustainability and climate change on the top of the global agenda, making it ‘not done’ to not jump on the ESG bandwagon. In other words: ESG is becoming the new standard for investing.

Strike ESG investment in Private Equity while the iron is hot

Staying ahead of the curve

ESG will alter the competitive environment of the PE industry. Here are the main actions to take to unlock the ESG opportunity.

Decide on the strategic positioning

Responsible investing all starts with deciding the level to which they want to embed ESG considerations across the firm’s activities. This repositioning will help designa suitable ESG strategy, starting from an assessment of the regulatory and competitive landscape. However, not all ESG issues matter equally and that’s why it’s key to seek a connection between sustainability and materiality by targeting the ESG issues that impact performance.

There’s also a wide range of reporting frameworks out there, like the United Nations’ Principles for Responsible Investment and Sustainable Development Goals, so which one do you need? These are the building blocks of a solid ESG strategy and roadmap, tailored to an organisation’s specific business objectives.

A resilient risk framework

Too often, companies are not addressing conventional risks and ESG-related risks equally. Overlooking environmental and societal risks can have significant financial and reputational consequences. Failing to manage ESG risks can severely hurt a business, including missed profits, operational impacts or the loss of a license to operate. It’s crucial to evaluate the full spectrum of risks - including ESG concerns. 

Think about risks linked to products and services, such as the CO2 emissions linked to cement production or geographical footprint for activities in countries with a high risk of corruption, for example. This defines the exposure of the company to each key ESG risk. Next up is examining the likelihood, vulnerability and impact of each  ESG risk: could they cause production to be stopped? Lead to lawsuits and fines? Tarnish your reputation? 

Finally, it’s key to evaluate the policies, programmes and initiatives in place to mitigate ESG risks, and how they minimise negative impact or exposure. When it comes to integrating ESG ratings (by evaluators such as MSCI and Sustainalytics) into your ESG risk assessment, PwC can guide you through the complexities of deciphering and comparing your results.

Looking through an ESG lens

ESG is no longer an optional 'add-on'. Beyond merely monitoring ESG performance, it's crucial to align a company’s entire business model to take into account societal challenges. This will undoubtedly generate new opportunities in the medium to long term. 

To do so, it’s key to have a 360° view and benchmark the performance and operating practices of other companies in order to fine-tune the strategies of each portfolio company.

Untangling the complexity in ESG reporting

As regulatory requirements to disclose and report about ESG are mounting and investors are actively focusing on ESG metrics, the reporting challenge is one to take seriously. In the end, what's measured, gets improved. While at its core, ESG reporting is about measuring the value created beyond profits, the reality is often more complex.  

The wide variety of voluntary frameworks that exist today - like Climate-Related Financial Disclosures, Principles for Responsible Investment, customer data platforms - make it a daunting task that stakeholders struggle to interpret in a coherent way. The EU Non-Financial Reporting Directive requires companies to not only report on their sustainable investment approach, but also on how they do business and engage with stakeholders. 

In this new environment, words speak as loudly as actions. So it’s key to report in a transparent and clear way on each ESG initiative. Our experts also have deep expertise in helping organisations achieve regulatory compliance with the EU . 

More about ESG reporting

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Marc  Daelman

Marc Daelman

Partner, PwC Belgium

Tel: +32 477 50 00 38

Philippe Estas

Philippe Estas

Partner, Deals - Transactions & Private Equity Lead, PwC Belgium

Tel: +32 477 27 07 50