Private equity firms focusing on ESG risks instead of opportunities, says PwC study

Private equity houses are failing to appreciate the value of environmental, social and governance (ESG) factors and are therefore missing out on opportunities to generate higher returns, according to a new report.

The report, by accountancy firm PricewaterhouseCoopers (PwC), is based on a survey of 103 private equity companies from 18 countries.

The survey investigated the industry’s attitude to ESG factors. It found that less than 15% of private equity houses calculate the value they create through ESG activity, even though more than 80% of respondents said that they monitor these activities.

Instead, the PwC report claims that private equity houses are focusing their ESG management activity “more towards risk than opportunity.” The survey found that the emphasis is on monitoring rather than valuation and the added value of any performance improvement generated through investing in ESG issues is being missed.

Phil Case, director of sustainability and climate change practice at PwC, said, “These results show that private equity (PE) houses understand the value of ESG management – whether it’s protecting value through managing risk, or generating value by spotting opportunities.

“But not only could PE houses generate more value through better ESG management, it is also possible for this value to be quantified and communicated to investors, acquirers and wider stakeholders.”

The survey also found that four-fifths of private equity houses believe that investor interest in ESG issues will increase over the next two years.

Case argued that this means it is imperative for the houses to quantify the benefits of ESG management, even if this isn’t easy. 

He added, “Even the most sophisticated PE houses see the challenge in understanding, calculating and communicating the value that good ESG management can deliver: it needs specialised skills, dedicated resources and new ways of thinking about how companies are managed and where economies and growth are headed.

“With investor interest expected to increase, this is one area in which PE houses can show how they make a real and measurable difference.”

In September, a survey of 1,000 global chief executives found that 93% said they consider ESG issues to be important to the future of their business, while 79% said that they provide a competitive advantage in their industry.

Only 12% of respondents said they think of investor pressure as one of their chief motivators on sustainability, although 69% believe that investor interest will become an increasingly important factor.

Further reading:

Survey: CEOs see opportunities within sustainability, but not immediate benefits

PRI study: ESG factors influence countries’ economic development and sovereign debt

Responsible investment terms: what is ESG?