How PE Is Acting As A Catalyst To Improve Portfolio Companies’ Performance On ESG Metrics

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RSM International recently put out a report analysing global M&A and private equity trends, which argued that PE firms are increasingly incorporating the improvement of ESG metrics into their strategies for portfolio companies, using their governance skills and turnaround experience to build performance and achieve a higher valuation when they come to sell.

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Q1 2022 hedge fund letters, conferences and more

ESG And The Changing Shape Of PE

Charlie Jolly: “Private equity firms can be powerful agents of change in middle market businesses. The vast majority of PE investments give the PE firm control or significant influence of the company. Because PE firms generally invest capital from pension funds and other institutions, the governance and financial rigour that comes with that investment is significant. So, PE firms are very experienced in implementing change in their portfolio companies.”

“They can bring ESG metrics and measurement frameworks to businesses that otherwise would have limited capability in this area.  Some PE firms have become a catalyst for transformation and purpose-driven activities within a company’s overall growth strategy.”

“For the PE firms, driving sustainable change is in their best interests. By putting robust ESG frameworks in place that drive measurable change in company activity, that change will be recognised and valued by the future buyer of the company. There are some PE firms that have consistently implemented successful ESG strategies and as a result, they have been able to raise dedicated impact funds.”

Challenges Of Benchmarking

“Almost all PE firms have ESG policies and procedures. However their approaches to ESG vary widely across the industry. The industry faces a real challenge in standardising the measurement of ESG activities so investors in PE funds can assess the differences in approach and performance between firms .”

“In response to the challenge, PE firms have been recruiting ESG and sustainability experts to their teams to ensure their policies are appropriate, monitored and successfully implemented. This expansion in the skills sets that PE firms have in-house is in keeping with a broader trend. 10 years ago a PE firm would have an investment team and a finance team. Today although investment teams still tend to be central, many are supported by dedicated investor relations, portfolio, ESG, talent, as well as IT and digital teams to help drive value creation in portfolio companies. Recent growth in the industry has initiated a hiring spree of late, and the Head of ESG or Head of Sustainability role is not as rare as it once was. We can expect this broader trend to persist through 2022.”