Private equity (PE) firms are increasingly aware of the need for environmental, social, and governance (ESG) management, a trend likely to continue, with 55 percent of firms recently surveyed by PitchBook saying they plan to increase their attention to ESG issues in the future.
The biggest challenge that PE firms cited in establishing an effective ESG program was effective metrics, followed by implementation, cost and employee participation, said PitchBook editor in chief Adley Bowden on a recent webcast, in which I was happy to participate.
The primary driver of PE interest in ESG is limited partners' growing attention to the issue, followed by environmental or social consciousness, brand or image, risk management, corporate governance, portfolio companies, government regulation, operational efficiency, cost management, employee interests and competitors, the survey found.
"Increasingly, we are being sent ESG questionnaires as part of the due diligence that LPs are doing on our fund," said Carlyle Group principal Bryan Corbett, on the webcast. "We view our program at Carlyle as providing them an answer and serving as a jumping off point for a broader conversation with our LPs about what their interests are and how we at Carlyle can do a better job of addressing them."
PE firms at the beginning stages of ESG management should start small and look for opportunities for early wins, without trying to achieve their goals all at once, Corbett said. Also, bear in mind that every firm is different in what drives adoption and what resources are needed, he said, urging firms to make use of free resources like EDF's Climate Corps fellows and ESG management tool. (I'll be speaking about the tool during a panel discussion at SuperReturn International in Berlin, Feb. 25-28.)
TPG senior advisor Beth Lowery agreed, noting that a couple of TPG's portfolio companies participated in Climate Corps. "You get a real product that can really improve energy efficiency and reduce costs; it's an excellent program," she said.
Some PE firms mistakenly believe that an ESG program will be expensive and that investors don't care about ESG issues, she said. In fact, successful ESG management should improve the bottom line, and many LPs care both about return and ESG management — you have to be careful how you word the question. Lowery stressed the importance of leadership support for ESG at both the firm and portfolio company levels.
"We found that our companies were interested in ESG to the extent that we could (1) show them value creation (and) (2) show them how it would benefit their relationships with customers and suppliers," Corbett said. "Very quickly, the companies begin to see it not so much as a bureaucratic, administrative task being pushed on them by their GP owner but rather as a business development tool that's going to help them expand their revenue base."
Both Corbett and Lowery stressed the importance of understanding your internal firm culture and building support with all stakeholders, rather than moving too quickly and losing buy-in. TPG's sustainability and leadership council has spread best practices among its portfolio companies, a framework that Carlyle and others have adopted with great results.
Overall the theme of the webinar was that a network of professionals is rapidly emerging across the private equity sector and collaborating in a way that is unusual for the industry. "We're all competitive. We're all trying to get the highest returns. We're all fighting over LPs, but on these issues, to a certain extent we're all in the same boat," Corbett said.