Are we nearly there yet? PE's responsible investment journey
November 15, 2016
Private equity is changing fast. Still only a relatively youthful industry (it’s barely turned 30), it’s reinventing itself from ruthless to responsible, and from opaque to transparent. That’s what I’m seeing from this year’s survey of 111 General Partners from 22 countries around the world (Are we nearly there yet? Private equity and the responsible investment journey) that uncovers how they incorporate responsible investment principles into business as usual and what drives their actions.
Most have now embraced a fundamental belief in the value that effective management of environmental, social and governance issues can bring – this is the lens through which PE houses view responsible investment. The majority of PE houses have now made a public commitment to invest responsibly (70%) and currently have a formal responsible investment policy or will do shortly (96%). With 83% also reporting to their investors on ESG activities, little is truly ‘private’.
Few would expect the PE community to take action on a ‘nice to have’ business case and they’d be right. There is a strong financial business case for responsible investment that’s evident throughout the deal cycle. Whether it’s screening targets for those potential red flag issues that might cause fines and additional costs to rectify or reputational damage further down the line, or for those ESG opportunities to command a higher premium at exit, effective ESG management provides the right approach to reduce risk exposure and increase investment returns. In fact, 40% told us that poor ESG performance has led them to demand a material discount or even walk away from a deal. Likewise, 41% told us that they would be prepared to pay a premium – although, interestingly, only 14% said they’d ever received a premium for strong ESG performance at exit, perhaps because so few, 38%, regularly include ESG issues in the programme for exit.
Having the right people, processes and tools in place is crucial to determine what interventions are required, to monitor progress and to report back to portfolio company Boards and investors. There has been a distinct shift here too – over the last three years, 78% of the investment team now have some formal training (up from 55%), and 68% now say they have the right tools in place (from 48%). PwC has helped many understand market best practice and define their approach, as well as strengthen their relationships with Limited Partners.
I feel this is an industry that is going places and is clearly on a journey when it comes to responsible investment. Potential roadblocks on the road ahead could be cyber security, human rights and climate risks but there is strong awareness of the issues and no doubt action will follow to reduce risks …. on cyber security, for example, 85% are concerned, but only 27% have taken action. But with the right leadership, investment, and support from investors (investor interest has more than doubled in three years from 21% to 46%) responsible investment will soon be the market norm.