Environmental, Social and Corporate Governance

ESG for Private Equity

Private Equity houses are focusing more and more on ESG for a number of reasons:

  • Increasing demands from the Limited Partners (LP’s) who are wanting much more than an ESG Policy
  • Public perception of the risks facing the planet related to climate change etc. PE houses are seeking to brand themselves as a forward-thinking entities
  • The fact that a good ESG program within an investment will most often produce savings and hence increase the Enterprise Value (EV)
  • Investee companies are themselves having to do more as a result of pressure from their clients and staff wanting to see more action being take

In the broadest terms, the elements of ESG can be described as follows:

  • Environmental - How a company uses natural resources, how their operations impact the environment, and how a company’s actions are impacting on global warming. Includes energy, waste, water, transport and carbon
  • Social - How the company manages its impact on employees, customers and the communities where they live and work. This also covers the role their supply chain plays
  • Governance - How a company’s board of directors lead, including board composition, executive compensation, policies, risk and strategic alignment

A few years ago an ESG Policy would have been seen as sufficient. Then PE houses started issuing 100 point checklists annually. This is now no longer enough, and we approach this whole piece in a very different way. Sustainable Advantage seeks to maximize the value each investee company gets from ESG and in so doing gets their buy-in. We do this by creating an annual Impact report for each investee company covering all areas of ESG and reporting statistics related to each area, together with the actions that have been taken in the past year and what is planned for the coming year. This document is used in discussions with staff, clients, potential hires, in fact a very broad group of stakeholders.

From the PE houses’ perspective they also get much more granular data than they had previously and the ability to share this in a much more informative annual ESG document.

Sustainable Advantage is the retained ESG advisor to over 25 PE houses. We’d love to hear more about your aspirations in this area.