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ESG Moving Up Private Equity Agenda But Climate Risk Exposure Needs More Understanding

The management of environmental, social and governance (ESG) issues is moving up the board agenda for private equity, however climate risk exposure requires greater scrutiny, according to a new survey released by PwC.

The Private Equity Responsible Investment Survey 2021 draws upon the views of 209 respondents from 35 countries and territories, including 198 PE houses. It finds that, compared with 2019, there is a shift from 35% to 56% of respondents stating that ESG features in board meetings more than once a year.

ESG factors are now routinely evaluated by private equity firms when making investment decisions. Almost three quarters (72%) of respondents always screen target companies for ESG risks and opportunities at the pre-acquisition stage, and more than half (56%) have turned down a potential investment or refused to enter into an agreement on ESG grounds.

The 2021 survey finds that nearly 95% are concerned about specific governance issues - business ethics, corporate values and culture; prevention of bribery and corruption; and cyber and data security. On issues that are fast becoming business-defining such as net zero, climate risk, biodiversity and emerging technologies, there is a significant gap between those who express concern and those who act, however. 91% consider climate risk within a portfolio as a concern, yet 47% have not undertaken any work around understanding the climate risk exposure of the portfolio. More than half stated they intend to in the next year. With respect to due diligence, the survey found that only 36% consider climate risk at this stage.

Will Jackson-Moore, Global Private Equity, Real Assets and Sovereign Funds Leader, PwC UK, said: “Over recent years PE firms have radically reassessed the importance and value of ESG to their business. The attitude and approach of PE firms has matured. ESG factors are reshaping the global economic landscape and will undoubtedly impact the investment success of PE in the coming years. Understanding both the big picture and specific portfolio ESG risks and opportunities will be key to delivering sustainable value creation.”

66% of respondents ranked value creation as one of their top three drivers of responsible investment and ESG activity, followed by corporate values (52%) and investor pressure (41%). Private equity is embracing a more proactive approach to ESG, in 2019 risk management was the biggest driver for activity.

When it comes to social issues, such as diversity and inclusion, 92% of respondents consider it a concern. Yet less than half (46%) have set some form of gender and ethnic or racial diversity targets. Encouragingly, of those that have set targets, 77% said that diversity is a core value for the organization.

“Like all industries, private equity needs to adapt in order to meet the societal and economic challenges of the day, and recruiting the right talent is crucial in this regard. This means hiring for specific ESG expertise and, in general, more diverse teams — in terms of gender, ethnicity, and age, but also socioeconomic background and training,” added Jackson-Moore.

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