Private Equity and ESG: Leading, Competing, or Complying?

Private Equity Value Creation Roundtable

In the dynamic landscape of Private Equity Value Creation, the integration of ESG (Environmental, Social, and Governance) has become a pivotal point of discussion as it focuses on a company's dedication to long-term, sustainable value, transcending short-term profits for enduring growth.

The trajectory of ESG investing speaks volumes of its growing impact and the role of Operational Excellence and Value Creation. Research highlights:

• ESG-Integration by CIOs: 90% of Chief Investment Officers now incorporate ESG criteria in investment decisions (Source: INSEAD's Global Private Equity Initiative)
   
• Market Performance: Companies strong in ESG metrics outperformed the market with up to 3% higher annual returns from 2015 to 2019
   
• Growth of ESG Investing: ESG assets under management expected to rise from 14.4% in 2021 to 21.5% by 2026
   
• Value Beyond Compliance: CIOs value ESG for brand enhancement, risk mitigation, competitive differentiation, and client attraction

For teams focused on Value Creation and Operational Excellence in Private Equity, the pivotal question is their strategic approach. Do your portfolio companies aim to merely comply, actively compete, or take a leading role in ESG.

Comply: Here, the focus is on adhering to regulatory demands, ensuring transparency and collecting data for reporting purposes. Given the increasing legal requirements around sustainability, compliance is a foundational step.

Compete: At this level, the integration of sustainability into business processes, selection criteria, and category-specific sustainability strategies becomes paramount. It's about embedding sustainability into the DNA of business operations.

Lead: Leadership in ESG requires identifying and capitalizing on ESG-related opportunities throughout the investment lifecycle. Key practices include exploring underfunded industries and geographies for sustainable deal flow, incorporating sustainability into exit strategies, utilizing green incentives and tax savings in deal structuring, and leveraging creative financing structures with low-cost green capital.

Despite these opportunities, many companies still predominantly focus on compliance, overlooking the potential to lead in sustainability. This gap presents a strategic opportunity for PE firms to redefine their roles from mere investors to catalysts of sustainable transformation.

H&Z supports Private Equity owners with Operational Excellence services focused on Data and Benchmarking Mastery   

Our journey begins with a deep dive into your portfolio companies' ESG data, extracting insights from reports and disclosures. We then benchmark this valuable information against global standards like the Global Reporting Initiative and the Sustainable Accounting Standards Board to set the gold standards for investments.

Insightful Analysis and Reporting: Moving forward, a specialized rating system is applied to evaluate and position companies against industry peers for understanding their ESG standing. Incorporating stakeholder feedback is vital, offering a window into the real-world impact of ESG practices. We ensure transparent ESG performance reporting from the companies, building a foundation of trust and credibility.

Strategic Integration and Verification: Final steps involve a thorough risk and gap analysis, turning potential risks into opportunities for growth. We advocate for third-party verification to solidify the ESG efforts' authenticity. Ultimately, we intertwine these ESG considerations into the broader business strategy, ensuring your portfolio epitomizes sustainable and responsible business practices.

At H&Z we combine experience in procurement with expertise in sustainability to transform your portfolio into a paragon of ESG innovation and profitability.