Keeping a close watch on his crops

Why private equity firms should be embedding ESG in their portfolio

A photographic portrait of Andres Saenz
Andres Saenz

EY Global Vice Chair - Strategy

2 minute read 01 Mar. 2021
Related topics
Private equity

With ESG moving up the agenda, PE managers need to embed it in their long-term value narrative.

In brief

  • PE firms need to create value in a meaningful and sustainable way.
  • PE firms are looking to progress their ESG focus to a more long-term value approach.
  • The COVID-19 pandemic has provided the opportunity to PE’s to embed ESG in their business.

In the current private equity (PE) environment, there is an emphasis on purpose and transparency. This is being driven by a combination of things: demand from limited partners (LPs), the dynamics of origination, regulatory developments, and being able to attract the best talent.

There is also social pressure and the question of PE’s license to operate. The PE industry is under greater scrutiny than ever before, and PE firms must do a better job of capturing and tracking the value they are creating and the impact of their activities.

Download the full PEI ESG article

PDF (2 MB)

It is not difficult to grasp that value these days is increasingly being driven by nonfinancial factors. For PE, incorporating these new value elements can open doors — offering new types of investment opportunities, as well as partnerships with entrepreneurs and family owners who care about their business’s legacy.

The PE purpose and transparency imperative

A variety of drivers show the importance of embedding purpose and transparency into PE strategies, and there are abundant statistics to support this:

How EY can help

  • Private equity value creation services

    Value creation is at the core of every transaction investment thesis. Our business is organized, resourced and led to help private equity firms transform companies and increase their ability to create more value across their portfolio.

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  • According to the Pitchbook 2020 Sustainable Investment Survey, 95% of LPs are either already evaluating ESG risk factors or will be increasing their focus on ESG risk factors in the coming year.
  • The 2019 EY CEO Imperative Study states that 80% of CEOs believe government, business and the public will reward companies for taking meaningful action over the next 5–10 years.
  • Companies that rank well on ESG metrics have outperformed the market by up to 3% per year over the past five years, according to the 2019 Bank of America Merrill Lynch Global Research.
  • According to the New York Times, employees at purpose-driven companies are 1.4x more engaged and enjoy 1.7x more job satisfaction. These employees are also 3x more likely to stay at their company.
  • According to the UN, an estimated US$3t–US$5t per year is needed to meet the United Nations Sustainable Development Goals (UN SDGs), and PE is likely to play an important role in contributing financial support to achieve this.

While the COVID-19 pandemic has forced a reassessment of operating models and investment priorities, it also provides PE with an opportunity to embed purpose and transparency more deeply throughout its business — at the firm, fund and portfolio levels.

In our latest Keynote Interview in the PEI Annual Report, Andres Saenz, EY Global Private Equity Leader and Simon Abrams, Director, Sustainable Finance, discuss how ESG is becoming a top focus area for PE. Read more here (pdf).


Summary

With growing interest in responsible investing, PE firms will be adding environmental, social and governance (ESG) elements into their investment strategy.

About this article

A photographic portrait of Andres Saenz
Andres Saenz
EY Global Vice Chair - Strategy
Trusted advisor to leading businesses. Strategic thinker. Execution focused. Marathoner. Family man.
Related topics
Private equity

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.