This chapter was first commissioned for and published in Private Equity International’s Responsible Investment Special 2015. The web link to the book is:

Private Equity (PE) firms are increasingly recognising the need to not just consider environmental, social and governance (ESG) factors as part of their investment process but also the need to effectively communicate their approach and the ongoing performance of their portfolios to stakeholders.

ERM has identified some strong market trends through the completion of over 250 ESG-related assignments across the globe for PE firms.

  • The evidence that ESG factors impact company value continues to mount, stressing the importance of an integrated ESG approach. For example, environmental considerations revealed $13m of potential value lost from continuity of supply constraints and limits on growth in a recent food business acquisition diligence.
  • Given the sustainability megatrends facing companies, such as climate change and water constraints, complex supply
  • chains and human rights concerns, ESG issues have a strong potential to present both material risks and opportunities.
  • Some leading companies are maximising value from proactively addressing ESG issues but in our experience more than 70 per cent of PE backed companies are yet to fully realise material ESG opportunities.
  • Shaping an effective ESG framework, including processes and reporting, to align interests of stakeholders is critical.
  • Applying a holistic ESG mind-set early in the investment process can help maximise business value.
  • Focused engagement is needed with portfolio companies including improved visibility and reporting of ESG at board level to enhance performance and realise greater value at exit.