Older and wiser: has responsible investment come of age?

by Will Jackson-Moore Partner, Global Private Equity, Real Assets and Sovereign Fund Leader

Email +44 (0)7710 157 908

Private equity sector has a vital role to play in supporting sustainable development. It is therefore encouraging to see from the findings of PwC’s new Private Equity Responsible Investment Survey 2019 that it is a responsibility that many in the sector are starting to take extremely seriously.

The survey draws upon the views of 162 participants from 35 countries and territories, drawn from a combination of private equity (PE) houses, or General Partners (GPs), and their investors, or Limited Partners (LPs). It is the fourth such edition of the survey which means that PwC have been able to track the growing significance of responsible investment over the years, from the first one in 2013.

The results are encouraging. According to the survey, 81% of respondents says they report Environmental, Social and Governance (ESG) issues to the Board at least once a year, and nearly a third do so more regularly. Almost all (91%) respondents say they either have responsible investment policies in place, or are developing one (up from 80% in 2013).  

Most importantly, perhaps, are the signs that ESG concerns are at the heart of the investment process rather than from elsewhere in the business. More than a third (35%) say they have a team dedicated to responsible investment (compared to 27% in 2016). Almost three quarters (72%) are using or developing KPIs to track, measure and report on the progress of their responsible investment policies.

We can also see a reassuring commitment to linking investment to the UN’s Sustainable Development Goals. 67% of respondents have identified and and prioritised SDGs that are relevant to their investments, and 43% have a proactive approach to monitoring and reporting portfolio company performance against the SDGs.

Yet while it is fair to say that responsible investment is ‘coming of age’ in the private equity community,  it is still at the ‘young adult’ stage of development. The survey indicates that there is much to do, for both private equity houses and investors. While there is a growing concern about traditional ESG matters such as human rights and cyber security, as well as new emerging themes such as climate risk, many are yet to start taking enough action.  

There is also a risk of ‘impact-washing’ - where it is claimed that investments have a greater SDG-aligned contribution or positive impact than can be evidenced, or using positive examples of responsible investment to divert attention from other investments where less action has been taken.

Fortunately, there are approaches that the PE sector can take to continue the progress highlighted in this report. Investors and PE leaders have a role to play in continuing to influence responsible investment behaviour, through demanding more robust and granular reporting around ESG matters.

All of us in the PE community have a responsibility to continue to ensure that responsible investment remains on Board agendas and influences daily business activity. These are the key questions you should be asking:

  1. Have you translated your ESG policy and commitments into concrete action (e.g. by ensuring ESG matters are integrated throughout the deal cycle)?
  2. Is RI a core component of your risk management approach, or is it just an add-on?
  3. After completing (ESG) due diligence on a portfolio company, do you keep engaging on material ESG issues and do you monitor the company’s ESG performance?
  4. When reporting, are you able to distil key facts and challenges on material issues, such as climate or human rights, rather than bundling them under the label of ‘ESG’?
  5. Can you explain how a robust ESG policy has added value to your portfolio and can you leverage that at exit?

Above all else, however, we should recognise that responsible investment is not an additional benefit. We are at the stage that we can see ESG genuinely driving returns, and enhanced ESG practices can potentially enhance exit multiples.

Many of us in the PE sector have long argued that sustainable business is good business. Yet this survey highlights that we can be even bolder: responsible investment may well be the next big value lever. The time has come to make sure we seize the opportunity, for ourselves, for our clients and for society at large.

by Will Jackson-Moore Partner, Global Private Equity, Real Assets and Sovereign Fund Leader

Email +44 (0)7710 157 908