Environmental Social Governance (ESG) and/or non-financial aspects are becoming increasingly essential as part of M&A transactions. For private equity firms, a pragmatic ESG Management approach does not only help in ensuring and maintaining competitive ability - it can also serve as a basis for an improved risk management and potential future value enhancements.
The growing importance of ESG aspects is evident. Exemplarily this is reflected by the increasing number of signatories to the UN Principles of Responsible Investment (UN PRI). Since the initiation of the UN PRI in the year 2006, the number of signatories (asset owner and investment managers) has risen from 63 to around 1950, now representing a value of more than US$ 80 bio in assets under management. Many of the signatories are from Scandinavia, France, or the Netherlands – these regions are leading. However, in an European market with potential regulation on sustainable finance on the horizon, the growing imperative for General Partners (GPs) all over the EU to consider ESG aspects cannot be ignored. In a time when comprehensive ESG-standards are still to be defined, a pragmatic ESG Management approach with established key elements should be the first step for all GPs as well as Limited Partners (LPs).
While the implementation of a responsible investment or ESG policy showcases and manifests an investor’s commitment, it is further vital to set up a performance assessment and reporting framework that helps to identify and manage essential ESG aspects along the investment chain. Such a system entails an appropriate due diligence process and should include continuous cooperation with according funds or portfolio companies during both the holding and exit phase to contribute to the ESG performance of all players involved.
When properly implemented and put into practice, the management of ESG aspects will meet the requirements of LPs and thus play an important role when it comes to a GP’s fundraising activities. The management system will also help to better manage risks and to identify potential value enhancement in various areas, such as in resource management, employer attractiveness, or business development. In summary this generates an added value for all stakeholders involved, reflecting the principles of responsible investment.