PE Firms Feel Investors’ Push on ESG Concerns

Institutional investors are pushing to place environmental, social, and governance (ESG) policies at the core of their private equity investments as a “value creator”, according to research.

The vast majority (85%) of private equity firms polled by the London Business School and manager Adveq reported that investor pressure to integrate ESG into investments is “intensifying.”

European firms felt the greatest push to adopt ESG policies, followed by managers in North America and Asia Pacific. Middle Eastern, North African, and Latin American firms faced the least pressure, the report said, “possibly reflecting the low penetration of socially responsible investment.”

“Private equity firms need to find better ways of collating ESG data in order to properly implement their long-term value creation process.” —Sven Lidén, CEO of Adveq

The study also found ESG strategies overall were taking on roles beyond risk mitigation and compliance.

“The private equity industry is increasingly placing greater importance to ESG… [as] a key long-term value creation strategy,” said Ioannis Ioannou, assistant professor of strategy and entrepreneurship at the London Business School’s private equity institute.

Ioannou added executives and board members were leading the charge in ESG integration “throughout the whole investment process, allowing them to create more value in the portfolio companies.”

However, despite increasing interest in adding ESG policies to investment processes, the report said there were barriers to overcome, particularly in collecting and comparing ESG data across investments, industries, and geographies.

“Private equity firms need to find better ways of collating ESG data in order to properly implement their long-term value creation process,” Sven Lidén, CEO of Adveq, said.

The respondents also cited the non-financial nature of ESG data, comparability across investments, and attitudes of internal managers as other barriers to adoption.

The study added being able to overcome these difficulties, especially in gathering and understanding ESG information, would help private equity firms achieve higher quality decision-making and transparency.