Study finds ESG now core strategy at private equity firms

Institutional investors are increasingly demanding that private equity partnerships have environmental, social and governance (ESG) policies in their investment processes, and ESG has now become a core strategy for the private equity firms to create value, according to a new study.

In the research, conducted by the London Business School’s Coller Institute of Private Equity and supported by private equity investor Adveq, 85% of larger private equity firms – managing assets in excess of $10bn (€8.2bn) – said pressure was growing to integrate ESG policies into everyday working practices.

Ioannis Ioannou, assistant professor of strategy and entrepreneurship at the London Business School, said: “The private equity industry is increasingly placing greater importance to ESG, moving it from a purely compliance and risk mitigating strategy to a key long-term strategy through which private equity firms pursue value creation.”

The study was based on responses from 42 private equity firms with collective assets under management of more than $640bn.

“Issues such as climate change, sustainability, consumer protection, social responsibility and employee engagement are no longer viewed solely as components of risk management, but have also gained recognition in recent years as important drivers of firm value, particularly in the long term,” the study said.

Pressures to put ESG policies in place were felt most acutely in Europe, the research showed, with the Middle East, Northern Africa and Latin America region feeling less pressure from investors and regulators.

But even though ESG policies were being adopted more and more, there were still some big obstacles to these being implemented, the study showed.

The most notable barrier was the difficulty in collecting the necessary data, it said. 

Also, some respondents cited the attitude of internal managers as a barrier to implementation.

“It appears that, while ESG integration has become common, there remain pockets of internal managerial resistance to the whole idea of considering such issues as relevant for investment decisions,” the study said.