As a follow up to ERM's survey in 2016, our engagement with over 50 Private Equity (PE) investment professionals reveals that Environmental Social and Governance (ESG) issues offer significant value creation and investment opportunities in the coming 3-5 years and that there are specific actions that PE firms can take to access the prize on their way to the ESG summit.

Embracing the resilience premium

Integrating ESG is no longer a “nice to have”; it is integral to strong corporate governance and business performance. The evidence is building: a report this year by HSBC (one of several pointing to similar conclusions) concluded that the stocks of companies with stronger ESG credentials and more robust climate strategies have outperformed those of their peers this year. Also, according to the Institute of International Finance (IIF)¹, “the relative performance of sustainable and ESG-focused assets in 2020 has been remarkable… 85% of ESG equity indices outperformed non-ESG peers in Q1 2020, as have 80% of ESG fixed income indices in Q2 2020.”

Our work on producing a brief with the World Business Council for Sustainable Development (WBCSD), through the new ERM SustainAbility Institute, shows how companies can build longterm resilience through addressing three key areas: developing risk-management capabilities; investing in human and social capital; and fully integrating ESG matters into decision-making. We have seen that robust ESG management has helped build resilience in companies, but the pandemic has really brought this to the fore. Going forward, it is clear that business resilience will be highly valued over the coming years, with investors and buyers willing to pay a premium for companies that can demonstrate strong ESG credentials and a resilient business strategy.

Objectives and approach for the 2020 survey

Against this context of increasing appetite for ESG in the investment community and the growing recognition that strong ESG companies are more resilient and can attract higher valuations, our key objectives for the 2020 survey were to:

• Uncover and share perspectives of private equity investment professionals towards ESG and investing behind sustainability mega trends.
• Provide insights regarding the value creation opportunity (both tangible and intangible) from embedding ESG considerations in PE transaction and ownership processes.
• Identify priority actions for PE firms to realize this significant ESG opportunity.

In 2016, against a backdrop of the Paris Agreement of COP21 and an increasing interest in the ESG agenda in private equity markets, ERM produced a report based on research targeted at General Partners (GPs) and Limited Partners (LPs) to explore the impact of ESG issues on investments and the state of ESG integration in investment and ownership processes. Roll forward to 2020 and for many, ESG is now a key part of investment discussions in the private capital markets. Many PE firms also realize that we have only just begun the climb up the mountain where ESG is a key value creation driver.

We carried out an in-depth survey with 54 private market investment professionals representing firms spanning five regions across the globe and a selection of Large Cap, Mid Cap and Small Cap funds.

Learn the key findings and recommendations from ERM's survey

1.) IF Green Weekly Insight, “ESG Funds Deliver,” June 2020. Q2 2020 data as of June 18, 2020.