Private equity firms must always stay at par with the big market trends. Now that many assets are managed under ESG strategies, PE firms are also thinking about sustainable investing issues. Now, investing firms give equal attention to ESG investments as any other crucial investment opportunity. While today ESG may not have the same bottom-line impact as other business issues, they realize that it will very shortly. Since private equity consulting firms predict formidable growth for PE over the coming years, the importance of ESG in their company operations will go up exponentially. Let’s look at how private equity firms are helping to drive investment in sustainable business practices.
Understanding the Extent of ESG
ESG business practices go beyond issues like social responsibility and climate change. They include labor policy, diversity, product safety, data security, and corporate and environmental impact on the community. Governance issues like corporate ethics and executive compensation are also a part of them. Companies shifting focus from shareholders to the entire stakeholder groups have witnessed real success.
What are PE Firms Doing?
PE firms have a solid position to help drive investment in sustainable business practices. Here are a few initiatives they have rolled out to meet the changing demands:
- PE firms hire private equity consulting for PE solutions supported by ESG driven insights. These consulting firms use data-based solutions to assess a PE firm’s ESG strategy and recommend the best ways.
- PE investors demand ESG-related information from their prospective investment companies to assess the strategy and risk involved. Most leaders focus on sustainability issues as they are highly responsible for affecting value and driving ESG outcomes.
- Some portfolio companies are still at the brink of their DEI (diversity, equity and inclusion) passage. PE firms set step-stones leading to progress for such companies. Many limited partners ask questions about DEI for their portfolio companies.
- Private equity firms are exploring multiple ways to assess their ESG objectives.
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Adopting the Sustainable Development Goals from the UN helps measure ESG progress. Some have become Sustainability Accounting Standards Board (SASB) members, while others work on Task Force on Climate-related Financial Disclosures (TCFD) recommendations. - Some PE firms encourage their portfolio company leaderships to shape sustainable practices. They must identify factors that affect their sustainability and manage costs. For instance, managing consumption helps save on utility bills, and addressing workplace issues reduces the severity and frequency of workplace accidents.
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It also includes identifying potential cyber risk and fraud sources and directly engaging with the staff to encourage ESG priorities.
The Best Way to Start
Having an ESG strategy in place drives real value in the market. Therefore, rather than being an option, it has become a necessity that every portfolio company must have in its bottom line. While consolidating the ESG reporting standards has come of essence, a PE firm needs to face several other frameworks according to their business needs. This is where private equity consulting expert enters.
A PE firm does not need to manage all of its ESG strategies itself. They may turn to PE consultants and incorporate strategy as suggested by their expertise and experience. Since every ESG strategy is different, taking action under the mentors is a value-boosting proposition in various aspects.
