ESG Is Now A Matter of Survival

Proven ESG frameworks can help private equity firms and their portfolio companies gain a competitive advantage. According to Andres Lagler, managing director and head of sales at ACRON AG, it’s much more than that: “It’s a matter of survival. It’s the future and a crucial component to any asset’s exit strategy.”

However, setting up an ESG program while keeping costs low can be a challenge. Specifically, emerging fund managers often share concerns over ESG research cost implications and often look for cost-effective ways to get started on their ESG framework journey.

Inês Borges de Carvalho, CFO of Oxy Capital, a private equity firm operating in Portugal. As an advisory company specializing in turnarounds, she says the firm has looked at keeping initial ESG-related costs low.

The firm chose B Corporation's Impact Assessment since it certifies large corporations that are based all over the world, such as Patagonia, a company known to promote its highly ethical values and working standards.

Borges de Carvalho notes: “What we have found is that all our limited partner inquiries included the same questions found in the certification questionnaire. They told us that we already had a good baseline.”

Adopting universal standards like the SASB Standards can aid private equity firms in prioritizing and implementing robust ESG policies and milestones across their organization and portfolio companies.

Organizational culture

ESG integration goes beyond costs and processes; it requires cultivating an ESG-driven culture within the organization. A practical approach is to distribute ESG responsibilities across different departments, regardless of the firm or portfolio company's size.

3i’s Sophia Walwyn-James, an associate director in the 3i private equity team who leads their sustainability initiative, explains: “Our ESG committee includes investment and non-investment professionals, especially those that have technical expertise that can help us navigate regulation. We report through that committee to the highest level of our organization, including the CEO.”

Walwyn-James recommends managers consider what their ESG roadmap will look like from a risk perspective. This will allow them to screen and mitigate any risks through stronger governance.

Fund managers should take the following into consideration to avoid ESG pitfalls:

1. Start sharing information with LPs during due diligence/fundraising.
2. If you have an ESG policy, make sure you can back it up with evidence.
3. Be upfront about your performance.
4. Start with an ESG framework that works for you and evolve from there.

Tools, such as SS&C Intralinks’ InvestorVision™ reporting portal, can help managers share ESG metrics directly with their LPs, with granular data across an LP’s portfolio in a single view.

ESG is critical to exit plans

Adopting recognized ESG frameworks is now essential to any asset's exit plan and vital to a firm’s survival — not just for gaining a competitive edge. Creating an effective ESG program with minimal expense is a challenge, especially for emerging fund managers. Nevertheless, considering the value it brings, fund managers should explore cost-effective options to accelerate the integration of ESG frameworks into their business.

Start by implementing global frameworks like the SASB Standards. These standards can help private equity firms in prioritizing ESG and establishing ESG policies across their organization and portfolio companies.

Successful ESG integration goes beyond costs and processes. It involves prioritizing ESG-driven policies across departments. Proactively sharing ESG information with LPs also demonstrates a firm’s commitment to this approach.

Incorporating these approaches enables private equity firms to navigate the ESG landscape more effectively, strengthening governance, improving transparency and creating lasting value for all stakeholders involved.