Against the backdrop of a record nearly $4 trillion of assets under management (AUM) in Private Equity (PE), we have seen 195 countries pledge their commitment to the COP21 climate action pact, continued growth in the number of UN-backed PRI signatories and investors showing ever-increasing interest in the ESG performance of their underlying portfolios.

In this context, ERM set out to complete a survey of the Private Equity sector to investigate the impact of ESG issues on the value of their investments. The purpose was to identify enabling success factors, the extent to which there are significant untapped opportunities within portfolio companies, and the potential for unlocking such opportunities.

This report presents the results of the survey, which involved interviews with 60 General Partners (GPs) and Limited Partners (LPs) from 17 countries across the globe, representing approximately $1.3 trillion AUM. The majority of firms interviewed are PRI signatories and as such ERM’s survey findings provide insight into current ESG practices and ideas for realising value from many of the leading firms in the sector.

Key highlights include:

  • 70% of respondents told ERM they have seen ESG have a material impact on their investments to date, either creating or eroding value.
    The respondents realising value from ESG tell us that there is a substantial prize to be attained by portfolio companies through robust ESG performance, whether this is enhanced margins in assets and services (40%), growth from new products and services (20%), positive contribution to the exit multiple (10%), or reputation enhancement (30%).

  • Only 5% of portfolio companies indicated they had accessed the full value creation opportunities.
    The survey responses indicate that ‘unlocking-value’ from ESG requires an increased maturity of programs, which can fully address linkages between material issues and company strategy in a way that generates commercial benefits. To-date a number of GPs and LPs have had success, enabled by firm senior management buy-in and inputs from ESG teams, in embedding processes at the firm level and an increasing number have started to engage with their portfolio companies to identify and report on ESG issues.

  • With over 95% of survey respondents confirming that there is significant untapped value from ESG within their portfolio companies, there is clear potential for further gains.
    However, as one survey respondent explained, “it’s all about the Exit and value realisation but ESG does not consistently fit on that agenda”

  • ESG leaders are not only seeing margin enhancements but also boosting the exit multiples of their investments and securing additional funds from their investors‎.
    Many respondents noted that it would be a real game changer if LPs started to explicitly recognise good ESG performance in their investment decisions.
    It was interesting to note that some GPs have already benefited from increased fundraising as a direct consequence of the outcomes of their robust ESG initiatives. Beyond LP recognition, the survey has identified three key actions that could ‘move the needle’ and unlock the significant untapped value identified by survey respondents.