(January 11, 2013) — Two-thirds of corporate buyers of private equity portfolio companies said that poor performance on environmental, social and governance (ESG) factors impacted their willingness to buy the company or prevented the entire deal, survey results by the United Nations-backed Principles for Responsible Investment Initiative has found.
The PRI commissioned PricewaterhouseCoopers to conduct a survey to assess the attitudes of trade buyers of private equity companies, evaluating ESG risks and opportunities in their M&A activities. The results showed that over 80% of companies had reduced the valuation of an acquisition target or not gone ahead with a deal because of poor performance on ESG factors, while 75% said poor performance in this area had prevented a deal from taking place.
“This report shows why ESG considerations should be a fundamental part of any private equity dealmaking process and how they can affect not only whether a deal happens but also its price,” James Gifford, executive director of the PRI Initiative, said in a statement. “Today, trade buyers are an important exit route for private equity investments and Limited Partners (LPs) are better able to influence fund terms – including seeking commitments on ESG management and reporting from their General Partners (GPs).”
According to Gifford, the PRI has seen growing interest from private equity companies in ESG issues and now counts over 150 GPs and more than 130 LPs as signatories.
Sixteen corporate buyers from a range of sectors, including Alliance Boots, Centrica, EDF and Xstrata, were interviewed on the following issues: integration of ESG factors into the due diligence process; integration of ESG factors into M&A price, sale and purchase agreements (SPA); and integration of ESG factors in the post-acquisition period. The majority of these companies had made between one and three acquisitions over the previous two years, PRI noted.
“The recent decision by private equity group Cerberus Capital Management to sell its investment in gun manufacturer Freedom Group following the tragic Sandy Hook school shootings in the US underscores the increasing influence of LPs and the growing materiality of ESG issues on investment risk, return and reputation,” said Gifford.
In addition, PRI’s research demonstrated that over half of respondents said they would expect a discount for poor performance on ESG factors, which they noted could impact the value of a company.
Download the PRI’s paper–titled “The Integration of ESG Issues in M&A Transactions”–here.
CalSTRS’ recent decision to sell off its investments in manufacturers of firearms that are banned in California, such as the assault rifle used in the Newtown, Connecticut, school shooting–is reflective of a rising sensitivity to ESG-related issues. “I think we’ve taken appropriate action, given the unspeakable and tragic loss of life that occurred in Connecticut last month-the latest in an ongoing line of similar incidents involving assault weapons and mass casualties,” said Investment Committee Chair Harry Keiley in a statement immediately following the January 9 decision. “This latest incident, which occurred at a school and involved fellow educators and the children we cherish, is a tipping point for CalSTRS and speaks to the correctness of our actions. This is not only the right thing to do but positions us to deal with the financial pressures we anticipate this sector of the industry will face.”