Why private equity isn’t focusing on ESG (yet)

For stakeholders who want to move the needle on ESG, one industry stands out: private equity. Among all sectors in PwC’s latest Global CEO Survey, PE chiefs were the least likely to say they’ve taken action to reduce emissions or to develop climate-friendly products or processes. The primary challenge is that ESG initiatives don’t yet have a clear, short-term financial ROI or value-creation story. Given that the typical ownership timeline for a PE-owned portfolio company is approximately five years, getting them to invest in ESG is like asking a house-flipper to join the local homeowners’ association. 

Yet for the stakeholders seeking to make faster progress on ESG goals, the lack of PE involvement is a missed opportunity. These firms have deep expertise in quantifying issues, making rapid improvements, and building on their experience to cross-pollinate unique ideas across their entire portfolio. Moreover, they comprise a huge share of the economy in the US and some other developed markets. 

Encouraging PE firms to take more action on ESG ultimately will require a nudge from from two of PE’s most important stakeholders:

• Institutional investors and limited partners (LPs), speak up. Private equity CEOs don’t face the shareholder pressure that their counterparts at public companies do. But institutional investors and LPs can demand greater progress on ESG issues from the PE funds they invest in.
• Regulators, clarify what’s required. Governments and various ESG oversight agencies are finally starting to establish requirements and coalesce around standards with clear reporting guidance and metrics. As those regulatory rules and voluntary frameworks get finalised, PE firms will have a clear mandate to attack ESG.

In other words, the current stance on ESG in private equity shouldn’t be “let’s wait and see” but rather “let’s embrace and take advantage.”