Accelerating ESG in Private Equity Firms

Status of ESG in PE in 2023 and how to move forward in 2024
Accelerating ESG in Private Equity Firms
Publ. date 28 Feb 2024
Finch & Beak’s research on the top European Private Equity firms in terms of Asset under Management (AuM) shows that this sector is not taking the lead in sustainability. Nonetheless, the dynamic business environment is evolving towards an inclusion of ESG into the investment processes from screening all the way to exit. In addition, while the sector seems to be taking steps to adopt sustainability agenda, there is still considerable room for improvement. This article outlines the ESG landscape in the Private Equity sector in Europe and the focal points for improving sustainability performance in the future.

Even if 2023 was an arduous year in terms of deal value for Private Equity (PE) – a 26.5% decrease year-on-year – European PE ended 2023 stronger than expected with €120 billion raised in new capital. In Europe, PE organizations are mainly located in the UK, Ireland, Germany, France, and the Netherlands and in terms of AuM, the top three leading firms manage more than €360 billion combined.

ESG readiness in Private Equity sector

According to Finch & Beak’s research conducted on the top 20 PE firms in Europe (based on AuM), Private Equity lags behind on several ESG practices and frameworks. Its focus is still more on short-term profitability instead of long-term vision and returns.

In particular, the study shows that only 25% of the top 20 firms participated in S&P Global’s Corporate Sustainability Assessment (CSA) in 2022, and that 50% performed a materiality assessment in the past – while none have applied the double materiality approach so far. Lastly, 15% of them do not have an annual ESG reporting system.

When it comes to implementing a sustainability agenda, PE-owned companies operate on a longer time horizon than publicly traded companies do, further facilitating the focus on ESG of their portfolio companies. According to LGT Capital Partners ESG Report 2023, Private Equity’s ESG approaches continue to progress year after year as 62% of firms assess and measure climate change-related risks and opportunities in their portfolio versus 38% of 2021 – a trend that is expected to further increase in the future.

Finally, the research concludes that PE sector needs support to comply with the upcoming CSRD directive, because currently ESG practices are not present or structured in a way that ensures greater transparency and comparability of sustainability information, which is crucial for investors.

In the download, you can find 3 acceleration tips enabling for PE firms to enhance their sustainability performance through concrete actions and to be prepared for CSRD compliance.

ESG best practice in Private Equity: CVC Capital Partners

CVC Capital Partners, headquartered in Luxembourg, is a leading global investment firm with €188 billions of AuM and more than 120 companies in its portfolio. CVC considers ESG as an increasingly important part of long-term value creation: in fact, ESG is integrated into the investment process, from initial screening through due diligence until the exit.

To get there, the company developed the CVC Value Creation framework which sets out six categories of KPIs that it engages on with portfolio companies. This framework includes categories such as customer and employee engagement, supply chain management, climate resilience, greenhouse gas emissions, and human rights.

Moreover, to monitor and drive progress, CVC uses a management approach consisting of:

1. External assessment: Portfolio companies are asked to undertake an assessment by an external ratings agency to provide an independent view on the progress being made on ESG issues and to identify further areas of improvement.

2. Annual ESG KPIs: On an annual basis, CVC requests data corresponding to the six categories of its Value Creation framework, including additional data that CVC deems material to its investment.

3. Sustainability reporting: Portfolio companies are encouraged to publish their own annual sustainability reports in line with international standards (GRI, TCFD and CSRD).

4. Climate action: CVC has set decarbonization targets at the portfolio level that have been validated by the Science Based Targets initiative (SBTi). For Scope 3 emissions, for instance, CVC commits to have 40% of its eligible portfolio companies setting SBTi validated targets by 2027.

During the holding period, CVC engages with portfolio companies providing direct support to drive further improvement through, for example, guidance on integration of ESG into governance, strategy, risk management and reporting.

Next steps for Private Equity to advance in ESG

In order to guarantee continuous high returns, Private Equity leaders have leveraged ESG approaches and aspects in their decision-making processes and evaluations. Three sophisticated ways they used to progress in ESG are:

1. Integrate ESG factors in due diligence, onboarding, holding periods, and exit strategies. The performance of each portfolio company is assessed on the critical ESG issues that might affect value creation. A double materiality assessment allows companies to quantify financial opportunities and risks of material ESG topics, thereby it’s a good first step to evaluate the value creation (or destruction) of well-defined issues.
2. Increase transparency in reporting of sustainability performance. With growing recognition that ESG performance contributes to financial performance, extensive ESG data collection from portfolio companies becomes necessary. The most important data to be collected are those based on the material topics identified in the above-mentioned double materiality assessment.
3. Assess and improve the ESG capabilities of portfolio companies. The PE business model offers the possibility for portfolio companies to improve ESG performance and transparency in a number of ways, such as providing tools to identify the relevant ESG issues, benchmarking among other portfolio companies, or capacity building by giving access to internal and external experts.

In conclusion, recently ESG has become more important into Private Equity’s decisions and for their investors due to the increasing recognition of the importance of ESG issues and also due to the belief that ESG integration will be essential to enhance the reputation and the profitability of Private Equity sector.

Eager to improve your ESG performance and be a leader in the market?

Finch & Beak and SLR Consulting can assist your company to go beyond the business-as-usual activities by offering you wide range of ESG services, including ESG performance assessments, 3rd party ESG benchmarking support, CSRD gap analysis and Double Materiality assessment. Knowing that Double Materiality can be a complex endeavor for PE firms and their portfolio companies, Finch & Beak has developed a tool box for firms to run their assessment independently and gather the right data across the portfolio for CSRD alignment.

If you are looking for hands-on support to accelerate the sustainability journey in private equity, contact Stéphanie Finet at stephanie@finchandbeak.com or +34 6 27 78 81 70 to discuss how Finch & Beak can assist you.

About Gabriele Vicario

Positive thinker with passion and involvement in sustainability and climate change, trying to find suitable solutions for everyday business activities. | gabriele@finchandbeak.com

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