ESG: The role of ESG for private equity
In its latest study, Finance Magazin asked around 40 investment managers from medium-sized private equity houses about the role ESG plays in their work. So far, not necessarily a big one. But why are ESG issues important for private equity in the first place? And why will this continue to increase in the future?
Public equity is already in on it
While large public equity houses such as BlackRock, Vanguard or State Street have had to address ESG issues comprehensively for some time, private equity investors are not yet required to do so. This is because public equity managers who invest in listed companies will be required by law to disclose ESG information on the companies they finance. One example of this is the so-called EU taxonomy, which must be applied as of 2022. The risks of investing in companies with poor or non-transparent ESG performance are therefore significant – and thus most listed companies are already required to provide ESG reporting.
But there is also increasing pressure for private equity houses to consider ESG criteria when selecting companies. In contrast to public equity, they usually invest in unlisted companies with the intention of selling their own shares at a profit in a few years’ time. ESG is increasingly seen as an additional selling point. And the major investors in private equity, for example pension funds or family offices, are increasingly attaching importance to ESG criteria and expect private equity managers to take these criteria into account in their investments.
Why is ESG important for private equity?
But it’s not only pressure from investors that explains the importance of ESG for private equity. Addressing ESG has two major benefits for the firms. First, it allows them to evaluate price risks. Private equity houses should conduct ESG due diligence before investing in a company. By doing this, they can avoid negative financial surprises due to poor ESG performance and satisfy their investors.
Furthermore, good ESG performance provides an additional value lever – exactly what private equity houses want to achieve with their purchases and sales. For them, putting money into ESG is worthwhile because the importance of ESG will continue to grow in the coming years, even for non-listed companies. As a result, private equity investors will be able to resell sustainable companies even more profitably.
In order for companies to prepare for the growing ESG requirements of private equity houses, they should disclose their criteria. This is still often lacking, especially when it comes to specific ESG requirements. But one thing is certain: private equity will no longer be able to avoid ESG issues in the long run.
Would you like to learn more about ESG and private equity? Feel free to get in touch with us!