Private Equity is entering a new age of ESG (Environmental, Social, and Governance) maturity. It has the potential to become a powerful change agent for progress and the B Corp framework is a crucial tool to support this shift.
In recent years, the concept of ESG has gained significant traction in the corporate world. Private equity (PE) firms have started to embrace ESG principles in their investments, with up to 79% considering ESG credentials when making investment decisions (EY 2021 Global Private Equity Survey).
Explore the catalysts behind this transformative shift and uncover why ESG’s growing significance is redirecting the private equity industry.
ESG is a driver of value creation
There is growing recognition that robust ESG performance significantly impacts a company’s long-term value and resilience. McKinsey’s study reveals that 25% of investors would pay a 20-50% premium for a company with a positive ESG record.
Even those who believe ESG does not affect shareholder value would still pay a 10% premium for companies with strong ESG credentials or performance. Prioritising ESG allows private equity firms to align investments with sustainable practices and enhance the value and resilience of their portfolio companies. This strategic ESG focus acknowledges that strong performance in this area is not only an ethical responsibility but also a crucial driver of business success in today’s rapidly changing environment.
Long-term and illiquid nature of investments
Private equity investments demand long-term capital commitment, often lasting for a duration of 10 years. Unlike public investments, which can be bought and sold reactively and quickly, private equity investments have little to no opportunity to sell, creating a long-lasting partnership between lending and general partners, and potentially exposing them to reputational risks.
In the competitive landscape of raising capital, this drives private equity firms to build and demonstrate their ESG credibility, as it helps mitigate risks associated with the long-term, illiquid and discretionary nature of private equity investments.
As a result, private equity investors, including lending partners, are putting significant emphasis on ensuring the general partners they invest with have a robust approach to ESG.
Rise of reverse due diligence
In addition to their core mission of attracting capital, purpose-driven companies now engage in ‘reverse due diligence’ on potential buyers. These businesses scrutinise potential partners to ensure they align with their values and purpose, going beyond solely financial considerations. By evaluating ESG practices, ethical standards, and mission alignment, these companies actively mitigate the risk of reputational harm and protect their commitment to social and environmental responsibility.
This proactive approach recognises the vital role of values-aligned partnerships in sustaining long-term success for purpose-driven businesses. It fosters collaboration, cohesion, and a shared commitment to social impact between investors and companies.
The BIA is a crucial tool to support this shift
While the industry is placing increased focus on ESG, firms are faced with the challenge of finding effective ways to measure and track the ESG performance of their portfolio companies. One tool that is proving to be pivotal in supporting this task is the B Impact Assessment (BIA). The BIA is a comprehensive, third-party assessment tool that evaluates a company’s impact on workers, customers, community, and the environment.
The assessment:
- examines a company’s operations, supply chain, governance, and business model, and provides a scorecard of the company’s ESG performance.
- is conducted by B Lab, an independent non-profit organisation that also administers the B Corp certification.
- provides a standardised way to measure and compare the ESG performance of portfolio companies.
- uses a consistent set of metrics to evaluate a company’s ESG performance, which allows private equity firms to compare the performance of different companies within their portfolio.
- provides a clear roadmap for improvement by identifying specific areas of weakness.
All of this helps portfolio companies to focus their efforts on the performance areas of most importance. And consistency creates a common language for measurement, making it easier for firms to demonstrate transparency and report on the ESG performance of their portfolio companies.
The private equity industry is witnessing a new era of ESG maturity, driven by the recognition of ESG’s impact on long-term value creation and risk mitigation. To support this shift, the B Corp framework and the B Impact Assessment are proving to be crucial tools for measuring, comparing, and improving the ESG performance of portfolio companies, enabling private equity firms to align their investments with sustainable practices and drive positive change in a rapidly evolving business landscape.
Client spotlight: Piper Private Equity
Piper Private Equity helps founders build global brands that make people’s lives healthier, happier and more fulfilling while supporting them to minimise their impact on the environment. Through their B Corp journey, Piper has become a true advocate, using their influence to educate and inspire brands.
Accelerate your impact journey
Our B Corp, carbon and ESG strategy experts have helped a number or PE firms on their impact journeys, including Tenzing and Piper Private Equity. Get in touch if you’d like to talk about supporting your private equity portfolio to develop an ESG roadmap.
