PE and the SDGs: action overtakes expectation
15 November 2016
Tarred with the brush of capitalism by many, PE houses are probably the last industry group one would expect to be engaging with the SDGs. But a surprising number in our PE responsible investment survey not only recognise the benefits and are planning to assess their impact, but are also already taking action.
A quick recap on the SDGs. Full name: the ‘UN Sustainable Development Goals’ - they are 17 goals that 193 governments have agreed to deliver by 2030 to tackle major world issues – everything from hunger to decent work to life underwater to peace. They are a modern day blueprint for sustainable, and therefore hopefully more successful, living for everyone on the planet, in developing and developed countries alike. Covering the full remit of risks and opportunities a business faces, they equally apply to business and could be a new performance dashboard. In much the same way that ESG management has taken hold within PE (more on that later), SDGs represent a more comprehensive approach to risk management and responsible investment.
So why the surprise? Not only is awareness of the SDGs high, 84% said they’re relevant to their business, but also many recognise that there are benefits from aligning their investment practices to them. 35% told us that the SDGs already aligned with their culture and investment thesis. More than a third (36%) said that doing so creates opportunities to increase returns, and almost a third (30%) believe they offer reputational benefits.
The results of this years’ survey give some clue to this surprising turnout. In the last three years (we ran a survey of the PE community in 2013 and then again this year), the PE approach to responsible investment (or Environmental, Social and Governance (ESG) management in PE circles) has moved forward considerably. The majority of PE houses, 70%, have now made a public commitment to invest responsibly (up from 57%) and 96% currently have a formal responsible investment policy or will do shortly. With 83% also reporting to their investors on ESG activities (up from 56%), PE houses are very engaged on ESG matters and it is very much a part of the deals process. With responsible investment so entrenched, it can be no surprise that engagement with the SDGs is high, despite the fact the goals were only ratified in September 2015.
PE houses in our survey aren’t just talking about SDGs, many are already taking action. One in four are embedding the SDGs into their strategies and the way they do business. Over one third (36%) are engaging with portfolio companies on responsible investment issues that are incorporated into the SDG framework, and almost a fifth (19%) are allocating capital to investments that promote sustainable development.
However, it’s not universal engagement by any means. And there is also procrastination, likely a result of uncertainty about how to translate the SDGs into investment practices and outcomes. Fully 80% of responding firms have not begun planning how to respond to the Global Goals, and 94% said they don’t have the tools available to assess their progress against them.
There is a note of caution. The private equity industry is lagging behind other sectors. PwC conducted a broader survey of attitudes towards the Global Goals in September 2015. It found that 43% of survey participants from financial services firms, rising to 51% for business as a whole, plan to assess their impact on the Global Goals, compared with only 21% of respondents in this PE survey. Likewise, in some jurisdictions, there is considerable scepticism towards the SDGs. Among PE respondents as a whole, 16% consider them to be irrelevant to their business, but this rises to 26% among French PE firms.
On the whole, there is a good news story around the SDGs. Governments will turn to business to help them achieve the SDGs, and not through donations or philanthropic activity (although that will help too) but by reviewing and changing business practice to be fit for purpose in an SDG centric economy. PE houses are part way there in reviewing their portfolio companies against ESG issues, identifying red flag issues and applying interventions to improve performance against ESG measures. It is a logical next step to adopt the same process, to review against a wider set of SDG issues. As Government policy becomes clearer so no doubt PE engagement will increase, after all 44% told us they will increase their work around the Global Goals in the next 5 years.