Mar 17, 2022
The sustainability revolution: 4 reasons why private equity invests in sustainability
A new revolution has taken the private equity industry by storm and it looks like it’s here to stay. Private equity businesses are always looking to expand their portfolios, and from the looks of the latest data, it’s easy to spot a pattern. Privately owned companies are starting to incorporate sustainability practices into their strategy and focusing their mission statements on providing value for the planet and its people. This is making them very attractive in the eyes of private equity leaders, but many are still wondering: why should they follow their lead?
To shine a light on this topic, we have to look at the source of this new trend. Investors and stakeholders are looking at factors that are becoming increasingly important in their analysis. We’re talking about ESG factors . Environmental, Social and Governance (ESG) criteria analyzes a company’s ability to reach societal goals and provide value that goes beyond financial profit. Just in the last year, support for sustainability proposals in stakeholder meetings grew by 32% in America. With an all-time high of USD $649 billion poured into ESG-focused funds globally in the year 2021(an increase of approximately 20% from 2020), it’s easy to see why a lot of investors are looking out for future opportunities.
Every private equity manager should keep an eye out for ESG criteria, but many are still paying little attention. What most fail to see is the practical benefits that investing in sustainability might earn you. Major leaders in the industry are heading in this direction and there are specific reasons why they are thriving. Keep reading to find out why you, as a private equity firm, should invest in sustainable businesses and make sustainability a priority!
1. New ESG regulation
A lot of new regulations are coming into force within the next few years, and many are putting an emphasis on ESG disclosure. A lot of the new legislation will affect the private equity industry, and that is definitely going to change the playing field. Most privately owned companies are already under a lot of pressure to comply with multiple mandatory requirements, and this pressure will only continue to grow without adequate preparation.
On a European level, the EU Taxonomy Act has released a lot of ESG-related regulatory developments in the last few months, but the European Commission is pushing for many other initiatives. From the Sustainable Finance Disclosure Regulation (SFDR), to the green bonds standard, the EU is encouraging many ways to incorporate sustainability into financial decisions, again signaling its importance
The sustainability revolution extends beyond the continent’s borders: on an international level, the International Sustainability Standards Board (ISSB) is creating a new framework for sustainability risks that financial reporting simply can’t capture.
All these mandatory requirements can be overwhelming and it’s easy to complain about them, but there is a major upside: institutions are leading the way, offering a lot of growth opportunities on investing in sustainability. We say it’s time for you to take advantage of that.
With constant changes in regulation, as well as a steady flow of new regulations being introduced, we know it can be overwhelming to keep track of everything. Why not start with familiarizing yourself with the 4 key sustainability legislations you should know in 2022?
2. ESG responsibility leads to better governance
Sustainability is not only better for the environment, but also for profit! If you’re a private equity firm taking a look at different companies, we’d say definitely keep an eye out for companies who have a strong sustainability vision and strategy!
Sustainability affects different aspects of the company, from supply chain management, to distribution. ESG factors take a lot more into account than just financial data: they take a look at the social and environmental costs as well, on top of the finances behind it. These businesses usually have a more solid structure, handling the challenges that come their way, and seizing opportunities for growth and profit.
ESG investments are made to highlight the commitment to creating value in the long term, and to invest in sustainable growth. By focusing on and committing to ESG factors, companies are promising a value increase that could extend years down the line.
Companies that have a better understanding about their operations are more likely to make better decisions. Staying updated with the high amounts of information and data means that managers have the kind of knowledge that ensures strong governance.
This leadership is now more necessary than ever, and will become more important with time. And wouldn’t you know it, businesses with solid governance tend to lose less money – need we say more?
3. ESG investments reflect on risk management
Looking at the recent trends, there is one strong explanation as to why private equity businesses are investing in companies who focus on ESG. The reason? Companies with sustainability strategies mean less risk!
Choosing an investment is a difficult task that requires a serious analysis of stakeholders and what affects them. However, most analyses only scratch the surface! Using ESG targets gives analysts the freedom to explore different areas that are often overlooked. With this process it’s easier to find areas that could lead to a massive profit for the business.
An ESG analysis focuses on the needs of customers, employees and stakeholders. This usually means more attention being paid to parameters and data, as well as a more detail-oriented view. After all, being comprehensive helps prevent them from potential greenwashing (and maybe even sdg washing) as well.
Investing in a diversified portfolio of businesses that make sustainability their core business strategy means choosing companies that did their research. It means choosing companies that managed to hop on this new opportunity by taking into consideration new legislations and intriguing market changes into their strategies.
In-depth research and more attention to detail exponentially lowers the investment risk. Because of that, potential is rising. If you’re a private equity firm and you want to maximize your profits, it’s definitely time to act now.
4. Good of the planet
Climate change and sustainability are becoming relevant topics in people’s lives. Companies are now starting to better understand the impact that they have, and want to become part of the solution. By choosing to invest in companies with a focus on sustainability, private equity businesses are making a statement. They are showing to the world that they want to address the needs of society and the planet – as they should!
Having a sustainability-oriented vision is also a great advantage from a public relations standpoint. A vision focused on creating value for society and the planet is bound to be more attractive to the eyes of the public. Showing the firm under a better light is a guaranteed way to generate financial returns.
With a thriving future for the world and the people who live in it, value grows along with it.
Are you ready to invest in sustainability?
The time to invest in ESG investments is now. Sustainability investments are quickly becoming part of private equity portfolios – we’re far from the days where it’s treated as a mere afterthought. We encourage managers to see this opportunity as the accelerator for change that could be – and as we like to say, better business for a better planet! Believing in this change might seem like an investment in itself, but as you’ve seen, all evidence shows it will pay off!
Are you a private equity organization that’s in need of some help to get started on your sustainability journey? Or maybe you’re an experienced firm looking for a way to make your process more efficient?
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