Sustainable responsible investment (RI) is an increasingly important priority for private equity (PE) firms, according to a new report from PricewaterhouseCoopers (PwC).
PwC’s Private Equity Responsible Investment Survey 2019 finds that the industry’s appetite for RI is growing, and that environmental, social and governance (ESG) considerations are increasingly factoring into their investment strategies.
“ESG issues have moved from niche to mainstream, with 81% of our respondents having adopted a responsible investment policy and 81% also reporting ESG matters to their boards at least once a year,” the report says, and more than a third of respondents now have an in-house team dedicated to responsible investment, up from 27% in 2016.
The driving force behind this growing interest in ESG drivers includes risk management considerations and corporate values. With 28% of survey respondents citing corporate values as the primary driver, “This could be a sign that responsible investment is being perceived as the ‘right thing to do’,” the report says.
PE firms are also increasingly aware of, and aligning with, the United Nations’ Sustainable Development Goals (SDGs), the report says. For instance, two-thirds of survey respondents now say that they they’re prioritizing SDGs that are relevant to their investments, up from 38% in 2016.
“While the drivers behind this momentum may vary from player to player, our view is that responsible investment is likely to rise to the forefront of all decision making in this industry and become business as usual,” the report says.
Compared with previous surveys, PwC is seeing a higher correlation between concern about ESG issues and firms taking action. “Respondents indicate that they are not only concerned about bigger risk factors such as human rights or climate change, but are actively taking measures to address the specific human rights and climate issues they regard as most significant in the long-term,” the report says.
However, there are areas where firms’ concerns are not matched by action, the survey finds. While 80% of respondents say that they are concerned about emerging technologies such as artificial intelligence (AI) and automation, only 20% are taking any action. Additionally, 89% say they are concerned about cybersecurity, but only 41% are taking action to deal with the issue.
“This is a really encouraging survey that suggests responsible investment is starting to come of age in terms of driving sustainable business practice. The private equity sector has a vital role to play in supporting sustainable development: the survey highlights that private equity houses and LPs are taking that responsibility seriously and driving genuine change. That is especially important as their role in global capital markets increases,” says Will Jackson-Moore, global private equity, real assets and sovereign fund leader at PwC, in a release.
Looking ahead, PE firms’ reporting, both to their board and publicly, will become increasingly detailed and will focus on the most relevant ESG issues, rather than a general interest in RI. “Many respondents are now applying a materiality lens to identify which ESG issues are most significant for them and for their stakeholders,” the report says.
“We are at the stage that we can see ESG genuinely driving returns, and enhanced ESG practices can potentially enhance multiples: it may well be the next big value lever. It is therefore vital for PE houses and investors alike to recognise that even if responsible investment may seem challenging there are numerous solutions and frameworks that can be applied to achieve positive outcomes,” adds Jackson-Moore.
The report is based on a survey covering 162 respondents from 35 countries.