PwC study on sustainability in the private equity industry: from “nice-to-have” to “must-have”

Sustainability issues are steadily moving up corporate agendas. The same applies to the private equity industry.

Firms have responded to pressure from investors and begun to focus on environment, social and governance criteria, or ESG for short. 83 percent of private equity firms now have a responsible investment policy. This was far lower in 2013 at 55 percent. These are the results of a global survey by PwC.

70 percent of private equity companies in the survey have even made a public commitment to a responsible investment strategy “Managing environmental, social and governance issues, or ESG for short, has moved from being “nice to have” to “must have” in the private equity industry”, comments Hendrik Fink, Partner and sustainability expert at PwC.

One reason for this shift is pressure from investors. But the industry has also recognised that sustainable investments pay off financially too. “This turns sustainability into a value driver: a responsible approach on ESG issues justifies a higher acquisition price; poor performance depresses the price,” assesses Steve Roberts, Head of Private Equity at PwC in Germany. It is used by the target companies to minimise any reputational risks which private equity firms include in their scrutiny alongside other aspects.

Risk management is becoming a key driver of sustainable investment

But risk management, not so much pressure from investors, is now the key driver for sustainable investment. That’s the view of 44 percent of those surveyed (2013: 36 percent). The list of risks facing the industry and its portfolio companies is a long one: Top of the list are cyber attacks, followed closely by human rights and climate risks. Digitalisation and the trends associated with it also provide not just opportunities but additional risks too for private equity firms: A company’s future sustainability is today more than ever dependent on its digitalisation and requires a clearly defined digital strategy to minimise and prevent risks.

Summary of other results from the survey:

• Informed decisions: Sustainability criteria play a significant role when deciding whether or not to buy a company. 41 percent of those surveyed were willing to pay more for a target business that has a good management system for ESG aspects. 60 percent said they screen target companies for ESG risks and opportunities.
• Open communication: A large majority of companies provide detailed information about sectors and markets in which they are not willing to invest on ethical or moral grounds. They set out how they expect their portfolio companies to act on ESG issues. They also make statements about how they are integrating ESG issues into their own investment process and how they plan to report on it.
• Building the expertise required: 78 percent of firms now have employees dealing with sustainable investment initiatives (2013: 62 percent). Almost half (46 percent) are training their staff in this. This was far lower in 2013 at 29 percent. The companies are in part responding to the requirements of potential investors who have their own guidelines and are demanding the “know-how” required from the fund and its managers before they invest.