Private Equity's Advantage: Generating Value through ESG Integration

roof of impact for investors and stakeholders has evolved from a “nice-to have” feature to undeniable table stakes. Despite the ongoing backlash against the efficacy of ESG and impact investing, the general consensus is that sustainability is here to stay. Why is that? Done correctly, a good ESG strategy does, in fact, generate significant profit alongside meaningful purpose

ESG is now table stakes for businesses

Private equity is uniquely suited to generate value through ESG integration

PE investing – whether from Buyouts to Growth to Mezzanine to Distressed investing – takes stakes in private companies with the aim of generating substantial returns over a long-term horizon. This business model possesses distinct advantages over those in public markets when it comes to carrying out sustainability initiatives: 

  • PE firms have substantial control over their portfolio companies through ownership and governance influence. 
  • This control allows them to implement ESG frameworks, set performance goals, and foster sustainable practices within these companies. 
  • PE firms often have representatives on the board and influence over board composition.
  • PE firms have access to comprehensive information on financial and sustainability performance, unlike investors in public companies who rely on reported data.
  • PE firms have the authority to determine executive compensation and can take action, such as replacing underperforming CEOs, to drive desired outcomes.

All of these factors together allow for PE investors to create value by identifying ESG-related risks and opportunities early on, effectively managing them, and driving operational improvements that align their investments with investor values. 

Understanding the benefits of a strong ESG strategy

The most forward-looking fund managers take their strategy a step further by moving beyond ESG as a mere “box-ticking” exercise. They recognize that purpose and values should form the heart of every company’s business strategy. 

A private equity fund manager reviewing her firm's ESG report

Increased profit potential

Numerous studies have shown a positive correlation between ESG performance and financial performance. Companies that prioritize ESG factors tend to exhibit strong operational efficiency, innovation, and long-term value creation. By investing in companies with robust ESG practices, private equity investors can tap into the potential for superior financial returns. ESG integration can uncover opportunities for cost savings, revenue growth, and improved brand reputation, ultimately driving portfolio value. Embracing sustainable practices also helps position companies as leaders in their industries, fueling their competitive advantage and setting the stage for long-term success.

  • Companies that prioritize ESG factors have seen profits rise 9.1% and revenues grow 9.7% in the last three years (compared to a mere 4.5% for those that didn’t). (Capital Monitor)
  • A 2023 IBM IBV study revealed that entities perceived as ESG leaders were 43% more likely to outperform their competitors in terms of profitability. (IBM)
  • By placing the United Nations Sustainable Development Goals (UN SDGs)—one of the top ESG frameworks for large companies—at the heart of its economic strategy, the global economy has the potential to unlock $12 trillion annually in opportunities and create 380 million jobs. (WBCSD)

Enhanced risk management and mitigation

Companies that effectively manage ESG risks, such as environmental liabilities, supply chain disruptions, or reputational issues, are better equipped to withstand market shocks and operational challenges. By incorporating ESG factors into due diligence and ongoing monitoring, private equity investors can proactively address these risks, protecting the value of their investments and minimizing potential liabilities.

  • 80% of the world’s largest companies are reporting vulnerabilities to physical and/or market transition risks associated with climate change. (S&P Global)
  • Environmental risks in supply chains are projected to cost companies up to $120 billion within the next 5 years. Businesses are expected to incur expenses of $1.3 trillion by 2026 due to climate-related weather events. (CDP)
  • 97% of survey respondents pin issues such as data privacy and cybersecurity, workplace safety, and employment and product liability as key risk management priorities. (Willis Towers Watson)
PE investors crafting an ESG strategy to help future-proof their investments, mitigate risk and increase profit potential.

Alignment with investor values and growing demand for responsible investments

ESG integration allows private equity investors to align their investment decisions with their values and principles. Many investors are increasingly seeking investments that not only deliver financial returns but also have a positive impact on society and the environment. The growing demand for ESG-focused investments presents an opportunity for private equity firms to differentiate themselves in the market, attract capital from a broader spectrum of sources, and meet the evolving preferences of investors.

  • A whopping 84% of surveyed companies reported slight or significantly improved access to capital and financing opportunities—making it worthwhile to invest in improving their ESG performance. (Moore Global)
  • 76% of consumers say they will stop buying from businesses that treat the environment, employees, or the community in which they operate poorly. (PwC)

While there are clear financial benefits to investing within a responsible framework, it’s important to align every element of a firm’s unique approach in service of its North Star. Only then will companies truly reap the benefits of a well-crafted ESG strategy and impact story.

Next steps

Check out these articles next for further insights on how to translate your sustainability strategy into action:

The Tablecloth Voice
Icon - Elements Webflow Library - BRIX Templates