A new survey of leading private equity (PE) firms by ERM has found that companies that have embraced environmental, social and governance (ESG) issues are now having a distinct advantage in value creation.

This survey, which follows a similar exercise carried out by ERM in 2016, found there was a significant belief that considering ESG at the heart of investment will generate strong returns. The ‘mainstreaming of ESG’ in investment processes is well underway with 93% believing a focus on ESG will generate good investment opportunities. However there is still a certain reluctance from some to fully embrace the opportunity where a strategic outlook and systematic approach needed to realize ESG premium at exit, as an example only 25% of firms have a thematic ESG fund or strategy and take a reactive, opportunistic approach to ESG investment.

However the future is clear 86% of respondents expect the pipeline of ESG investment opportunities to increase over the next three-five years than currently. That said, there are some hurdles to overcome. The lack of harmonization of sustainability frameworks is a brake to ESG integration. The survey found 53% respondents admitting they are not using any ESG framework like the Taskforce on Climate-related Financial Disclosure (TCFD) to identify opportunities at a tactical level.

The report concludes that to truly realize the full potential of ESG, PE firms should consider the following:

  1. Setting a strategic vision, and fostering a culture that sees ESG as a significant value creation opportunity.
  2. Establishing the firm’s ESG investment strategy and process for identifying ESG market trends.
  3. Moving due diligence from compliance to ESG best practice to generate superior returns.
  4. Ensuring companies become “ESG Strong” during ownership to benefit from a higher exit multiple.

Commenting on the findings, ERM’s Global Transactions Lead, Jaideep Das said “The economic and social disruptions this year have meant the E and S, in ESG have come into much sharper focus for people across the world and with it brought an urgency of shifting from discussion to action. This new survey demonstrates a mainstreaming of ESG and PE firms who are ensuring that their investment approach is ‘ESG strong’ are likely to be winners, as we all reset following the shocks of 2020.”

Learn more and download the report