Investors demand ESG policies from private equity houses

Solar panelsInstitutional investors are pushing private equity firms to move environmental, social and governance (ESG) factors to the heart of the investment process, rather than viewing them just as

a compliance function.

London Business School's Coller Institute of Private Equity, in partnership with private equity house Adveq, surveyed 42 private equity firms globally with assets under management of $640 billion (€562 billion) and found that ESG is now a "core value creation strategy" – in other words, a key part of the investment process – for private equity firms.

The report found that 85% of larger firms surveyed are feeling the pressure to integrate ESG policies into their working practices most acutely from their limited partners (LP).

The support to adopt ESG more widely is coming from top executives at firms, the researchers say.

But there are significant barriers to implementation of ESG factors, most notably the difficulty of collecting necessary data. Data can be idiosyncratic, respondents said.

According to the report, pressure to implement ESG policies is coming mostly from investors in Europe, with firms based in the Middle East, Northern Africa and Latin America under less pressure from investors and regulators, indicating the low penetration of socially responsible investment in these regions.

Private equity houses are now using ESG when they purchase companies, and right through to exit. Only 26% of the respondents said that they implemented ESG policies just at the exit stage.

"ESG is no longer a box ticking exercise that occurs at sale time," says Sven Lidén, managing director and chief executive officer at Adveq.

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