Blog Post

ESG in private equity – grasp the opportunity

MACK BHATIA

Private equity firms can embrace ESG through the lens of value creation


ESG or environmental, social or governance, practices in the private equity sector presents a valuable opportunity for private equity firms. ESG integration into private equity strategy is not to be viewed as a good PR but it should be viewed as a core business strategy through the lens of value creation for its stakeholders such as LPs, investors and communities. 

Investors, portcos, communities or others impacted by equity investments are more inclined to private equity firms with authentic ESG practices. And so private equity industry is under greater scrutiny than ever before, and PE firms must do a better job of capturing and tracking the value they generate and the impact of their activities.

It's a domino effect

 

Most private equity investments stem from institutional investors or from capital commitments from other external financial institutions (limited partners). Other contributions to private equity firms comes from accredited investors for funds, or large endowments.

 

In the current environment, most of the financial institutions, investors or endowments have their own ESG commitments, and they are likely to focus on private equity firms with similar goals or aligned ESG practices. This is imperative for investors and limited partners as they may be (or rather will be) subjected to audits and regulatory compliance where they need to show the flow of funds to ESG driven projects.

 

Moreover, limited partners want to offer clear ESG communications to stakeholders and so have a desire to choose investments that make a positive contribution.

 

Henceforth, private equity firms are required to have an ESG strategy which is aligned to the limited partner’s ESG focus. The domino effect, then further pushes the portfolio companies and other private equity investments to adhere to ESG standards which, by now, would be at the core of the value chain.


ESG opportunities and value generation


There are many ways private equity firms can bring in ESG bring into their business mix or business model. The key, however, is to choose a path that will generate maximum value for the investors while they get aligned to the ESG practices.


ESG in existing investments : ESG opportunities, particularly environment friendly opportunities exist in every business. Private equity firms can influence the portfolio companies to follow ESG practices or identify new environment friendly opportunities in the existing business model. See here how business can embed ESG in their business model.


Impact funds: There could be various reasons a private equity firm may not be able to transition to ESG focused practices. These reasons such as limitations to the existing fund structure, business limitations of portfolio companies, etc. In this case, development of a new fund such as an Impact fund could be a great opportunity. Impact funds are created to capitalize on investments made with intention to generate positive, measurable social and environmental impact alongside a financial return (See example here). This allows private equity firms to formulate an ESG focused investment model, without disrupting immediate business.


Hybrid approach: A hybrid approach allows the private equity firms to continue working with existing portcos while they continue to identify new opportunities, particularly through a new fund or Impact fund strategies. A hybrid approach can send a very strong signal to LPs and stakeholders on private equity firm’s commitment to ESG practices, however it can also present strategic and resource challenges on the way.



ESG opportunities and value generation

 

Private equity firms have commitments on investment returns, and hence it may not be that simple to align with ESG standards or embed environmentally friendly investments, particularly with the already and current investment structure or portfolio companies.


Although challenges remain to accurately monitor and measure ESG, a thoughtful approach to ESG integration is becoming a must-have for LPs and GPs—so much so that future deals and investments could be jeopardized if such considerations are absent. LPs and GPs can take advantage of a growing number of tools and options as they plan concrete strategies, set priorities, balance environmental and DEI initiatives, and conduct ongoing evaluations to monitor ESG progress

 

There are strategic ways to overcome these challenges, particularly through stakeholder engagement along the value chain, both upstream (LPs) and downstream (portcos). Connect with us to know more on how we can work with you.



How can we help

 

theSustainability.io (TSIO) is a growth company that delivers Sustainability and ESG Solutions to corporations, companies, and investment firms.


Combining a unique expertise in technology, data and an in-depth knowledge of an ESG ecosystem, the technology solutions and services deliver on transparency, trust and reliability between corporations and investors, primarily to aid the flow of capital to corporate and companies ESG initiatives while showcasing business value to sustainable investors.


Reach out to us for any ESG related query or learn about  SIOChain  – a unique platform developed by theSustainability.io to enable supply chain sustainability. For any questions, comments or enquiries, please connect with us at theSustainability.io contact us  page.


Reach out to us

SIOChain - Supply Chain Management System

Supply Chain Sustainability - an imperative for your ESG strategy

By MACK BHATIA • 27 Jan, 2022
SIOChain - Supply chain sustainability management system positions you stronger growth working closely with suppliers or partners to manage your environmental and social impact. Through supplier engagement, supplier recognition, and sustainable procurement, you can manage risks while increasing productivity and efficiency within the value chain
ESG consulting services

Your ESG consulting partners

By MACK BHATIA • 28 Oct, 2021
Our team provides services and due diligence to not only identify ESG opportunities but help our clients quantify potential ESG benefits and risks, incorporate ESG policies into the strategies and activities, facilitate transactions between asset buyers and sellers, and provide confidence among all parties that ESG commitments are made, and risks are managed.
ESG and Banks - Embedding ESG into bank's strategies

ESG and Banks - A crucial component of an ESG ecosystem

By MACK BHATIA • 15 Jun, 2021
Varied ways banks can embed ESG into their own business strategies; Banks are a crucial component of an ESG ecosystem and banking sector can leverage ESG strategies to accelerate the low-carbon transition among public and private companies, while building up on their own ESG profiles. Know more
ESG Strategy and Business Model

ESG Strategy – Embed ESG in your business model

By MACK BHATIA • 23 Apr, 2021
It is very important that companies make sustainability and ESG a central component of their business model. “We know that climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity”, says Lary Fink from BlackRock. Authoritative statements like these present an opportunity for companies to prepare their business and our economy against the greatest global threats while it opens doors for capital access.
Sustainable Supply Chain SIOChain

Supply Chain Sustainability – Activate ESG and Sustainability through the supply chain

By MACK BHATIA • 16 Mar, 2021
It is imperative to activate ESG and sustainability through the supply chain to develop transparency and visibility on ESG and sustainability practices. Companies need to collaborate with their suppliers and supply chain participants in upstream and downstream operations in order to meet their environmental and sustainability commitments. See more.
ESG Strategy and ESG Communication

ESG Strategy – Attract investors through ESG communication

By MACK BHATIA • 16 Mar, 2021
Effective communication with sustainable investors focused on your ESG progress is an important component of your ESG strategy. It fills the gap between investor expectations and your sustainability or ESG strategy.Sustainability and ESG communication is an approach to engage your customers and investors, and to showcase your ESG progress and sustainability commitments.

How to build a strong Sustainability strategy

By MACK BHATIA • 15 Nov, 2020
Sustainability Strategy is very cohesive with any business strategy. However, it needs a structured approach for companies and corporations to reap the material, fiscal and economic benefits. See on how to structure business sustainability strategies.
Sustainable Supply Chain - Sustainability in a supply chain

Switch-on a Sustainable Supply Chain

By MACK BHATIA • 09 Nov, 2020
It is imperative to focus on supply chain sustainability in order to meet your sustainability commitments and meet your environmental targets. SIOChain™, a technology platform is designed to engage your suppliers and collaborate to measure, monitor and embed sustainability and ESG in your supply chain.
Sustainable Development Goals and Mack Bhatia - theSustainabilityio

Sustainable Development Goals and Green Financing

By MACK BHATIA • 24 Sep, 2020
The purpose of sustainable financing, as stated by the UN Environment Programme , is to increase the level of financial flows (from banking, micro-credit, insurance and investment) from the public, private and not-for-profit sectors to sustainable development priorities. The aim is to align financial systems, working with countries, financial regulators and financial sectors, and direct capital allocation to sustainable development that will shape the production and consumption patterns of tomorrow. Financial mechanisms such as Green Bonds, Social Bonds and ESG Linked Loans help this alignment as they promote public-private partnerships for sustainable development. The Sustainable Development Goals (SDGs) are a collection of 17 global goals set by the United Nations General Assembly as an agenda for the year 2030. These 17 SDGs are an urgent call for action by developing and developed countries and provide a blueprint for the peace and prosperity for people and the planet. The SDGs also recognize issues related to the planet, such as biodiversity, and to people, such as poverty, and accept that solutions to address all of these issues are interconnected. Green Finance (or Sustainable Finance) instruments such as Green Bonds, and bonds focused on other thematic issues such as Social Bonds, Sustainability Bonds or Sustainable Development Goal Bonds, can act as a strong bridge to the SDGs. Such initiatives allow the flow of capital to execute and meet corporate sustainability commitments. They are also attractive to institutional investors as they perceive financial commitments to sustainability as a good indicator of a corporation's ESG progress. Related: More about Social Bonds
Sustainable Supply Chain Management Green Supply Chain

Enable a Sustainable Supply Chain - SIOChain

By MACK BHATIA • 20 Sep, 2020
Get visibility and embed sustainability in your supply chain operations. SIOChain - a technology platform allows corporations to collaborate with their suppliers and other supply chain participants to measure sustainability metrics. Know more.
Show More
Share by: