Great opportunities are coming for the private equity (PE) firm with eyes set on taking sustainability to the next level. PE firms worldwide have an influential hand in the global economy, managing billions of dollars and impacting the companies they invest in. Bringing sustainability into a PE firm’s consideration may be the next great move a PE firm makes as companies and sustainability practices worldwide are being examined thoroughly through a microscopic lens.
With the growing complexity of the sustainability landscape, public pressure pulls PE firms to take action against climate change. A PE firm manages a significant number of assets, having a diverse portfolio of companies under their belt. By maximizing their influence in transforming business practices, a PE firm can take the lead towards sustainable development.
Sustainability is a cornerstone of business strategy. Evolving environmental challenges have steered businesses to rethink operations. Consumer demands and public pressure have made new developments in ethical consumption. Regulations have also taken more businesses and industries down the path of sustainability. Yet as the journey towards sustainable development also becomes a matter of accomplishing ambitious targets under tight deadlines and constraints, companies may require more support in achieving their sustainable development goals.
The PE firm, with its influence and extent of control over vast portfolios, is in a position to steer companies towards sustainable practices.
While private equity firms have focused mostly on ensuring proper corporate governance in the past, more opportunities lie in enhancing environmental impact and social policy. More and more investors and firms are considering ESG factors into investment decisions. Sustainable investments that have a social and environmental impact may also perform better in terms of risk and return profiles.
There is promise and potential for a PE firm venturing into sustainability as it drives positive change across companies and industries, creating a fundamental shift in how capital can be redirected to more sustainable economies.
Integrating sustainability in a PE firm begins during the investment stage. Here’s how PE firms take the lead in sustainability through practice.
Portfolio companies and potential investments are screened and assessed based on the risk and value they create. Due diligence is a critical step where PE firms have the opportunity to embed sustainability into their portfolio and investment strategy as this practice filters through and assesses targets based on risks and opportunities. This involves reviewing compliance with environmental and human rights regulations, measuring environmental and social impact, and going through governance practices, from risk management plans to anti-corruption policies.
By conducting due diligence, PE firms can analyze how a company approaches sustainability and manages ESG issues material to the company.
Once an investment is made, the PE firm takes an active role in managing a company in order to drive value and increase sustainability. Setting sustainability goals and integrating ESG into business strategies and operations are done to foster a culture of sustainability in the portfolio company. PE firms also often support companies in building capacity, knowledge, and expertise in sustainability. This could mean training and upskilling teams, and investing in specialists and green talent who can closely manage and support the company’s sustainability strategies over time.
Actively and regularly monitoring ESG performance and comparing this with benchmarks, baselines, and industry standards can further embed sustainability as a core tenet of a company. Through a PE firm’s guidance and resources, companies across the world can take part in making sustainable change.
To build stakeholder trust and confidence, and to demonstrate commitments to sustainable development, transparency and accountability is a crucial sustainability practice seen in reporting, disclosures, and communications. PE firms are adopting stringent reporting practices that also include ESG disclosures such as carbon emissions, waste, and governance. In these reports, third-party verification and certifications can help enhance credibility and trust. Outside reporting, PE firms are also ensuring effective and consistent stakeholder engagement in order to understand expectations and concerns of various stakeholders, from investors to communities.
Through transparency, reporting, and communications, a PE firm can review their data and progress and adjust their strategies accordingly.
Exit strategies also need to consider sustainability as a value enhancer and a core element that must continue post-sale. By the time of exit, investments that have improved their ESG performance can attract a broader base of potential buyers. These buyers can also be another sustainability-focused investor who can guarantee the continuing practice of sustainability in the business’s operations and strategies.
PE firms aim for responsible exits, ensuring sustainable operations post-sale. A PE firm can screen through potential buyers and select those who are more likely to commit to maintaining or enhancing the company’s existing sustainability practices. By having a responsible exit strategy, a PE firm can strengthen their own sustainable investment strategies and the sustainability of the company being bought.
Several challenges may be encountered when promoting sustainability within PE. Regulations and standards may vary across jurisdictions, thus complicating plans to implement uniform ESG strategies across portfolio companies. Measuring and quantifying sustainability impact is also another challenge PE firms may encounter, which may lead to challenges in accurately communicating and reporting performance. Lastly, a PE firm may experience a conflict of interest between maximizing financial returns and allocating and investing resources on enhancing sustainable practices.
Given these challenges, it is important to cement sustainability as a cornerstone of the firm as this provides a sense of direction and dedication to sustainable development. PE firms should also work on investing in talent and tools in order to effectively manage sustainability in their assets, from data management to strategy implementation.
A PE firm, with the right resources and a firm commitment to sustainability can reshape the world we know now into a sustainable economy.
Great opportunities are coming for the private equity firm with eyes set on taking sustainability to the next level. The unique position of a PE firm allows them to lead in sustainability and drive significant positive change. Through strategic integration of ESG principles and actively engaging companies to better their environmental and social performance, a PE firm can achieve great sustainable impact while gaining robust financial returns. This move towards sustainable investing is a fundamental shift that shapes the future.
At Keslio, we are deeply passionate about sustainability, equipping us with the expertise and extensive network needed to guide clients through their sustainability journey effectively and efficiently. Our expertise is particularly valuable for companies looking to embed sustainability practices into their businesses and investors looking to integrate ESG and impact into investment portfolios. To learn more about how Keslio can assist your organization on its sustainability journey, please don't hesitate to get in touch with us.
