As interest in sustainability grows, environmental, social and governance (ESG) factors are high on the list of investment criteria for private equity such as family offices, asset managers and pension funds.
Increasingly, high ESG, health and safety standards are no longer optional for companies; they are essential as consumers show a greater preference for sustainable products and employee talent seeks out sustainable companies. Regulators are also pushing the agenda with the European Green Deal and Disclosure of EU taxonomy alignment in December 2021 set to redirect capital flow towards environmentally sustainable activities.
While larger listed companies have the tools, time and budget to help them move to a more sustainable business footing, many private companies may not have the ESG maturity of their larger peers. At the same time, private equity firms are increasingly being asked to qualify the ESG standards of their investment portfolios. So with ESG requirements on the rise, what are the trends set to impact private equity going forward?
Widening the due diligence lens
Eight out of ten due diligence reports do not cover process and people safety issues and their impact on operational excellence exhaustively. With information not always readily available or lacking in detail, private equity firms should pay particular attention to integrating ESG factors alongside safety and operational excellence into their due diligence procedures. By widening the lens, private equity can gain a better picture of risks on the horizon to support early bid considerations and risk mitigation management. As a result, the input of ESG data and service providers will become integral to the private equity due diligence process.