I’ve been reading a lot about responsible investing. While it’s not a new concept, it’s one that has seen increasing acceptance in the private equity space of late. PwC goes so far as to say ESG (Environmental, Social, Governance) issues have “moved from niche to mainstream,” with 81% of respondents to the firm’s recent survey having adopted a responsible investment policy. In addition, the PwC survey finds that more private equity firms are not only concerned about ESG issues, they are turning that concern into action - 91% of respondents either have or are developing a responsible investment policy, according to the report.
It’s becoming a business imperative.
Why are private equity firms incorporating ESG issues into their investment strategies?
It’s partly due a reflection of larger societal trends. Consumers are increasingly adding ESG considerations into their decisions on where to shop and whose products to buy. While this trend is often associated with millennials, it extends to Baby Boomers, Gen Xers, and Gen Z. These same dynamics are at play when it comes to investing. Not only are people considering ESG issues when they shop, those with money are also doing so when considering where to invest. According to one report, socially responsible investing covers $26 trillion or more than 25% of all assets managed professionally across the globe.
At the same time, Private Equity firms, like other companies, are themselves attracting more employees for whom social responsibility is important – in addition to making money. ESG investments give them a chance to do both.
While there is certainly a level of skepticism among some GPs that socially responsible investing can make money, an increasing number of studies are showing that when done right, investment decisions which have included ESG considerations perform well over time. This trend is already playing out in the public markets, and is coming to private equity. It may be that these companies are better positioned themselves to take advantage of consumer’s appetites for social responsibility. It could also be that they are more financially stable, and able to attract and retain a more stable and engaged workforce. One Harvard study indicated that “companies committed to ESG are finding competitive advantages in product, labor, and capital markets…”
A competitive advantage for Private Equity?
ESG investing may provide a competitive advantage to those PE firms who adopt. It can be an advantage when it comes to fundraising, as well as in the war for talent. It may also be a way to differentiate among a sea of sameness when it comes to attracting business owners looking to sell.
So how is socially responsible investing fitting into your strategy?