ESG Leadership in Private Equity
Private equity’s mission of creating an ESG-friendly economy.
As the drive for Environmental, Social and Governance (ESG) in private equity accelerates, its senior decision makers have a rocky mountain to climb. Moving away from exclusively financially driven investment and management patterns is a complex endeavour.
For true transformation, private equity leaders must integrate ESG into all levels and dimensions of their portfolios. They must communicate clearly with critical stakeholders. Install monitoring and reporting systems that deliver consistent quality of information. And translate ambition into action by changing core business habits.
Unsurprisingly, progress is uneven.
How can the private equity sector use its pivotal economic position to shape the sustainable businesses of tomorrow and fulfil its social responsibilities?
This report delivers observations and guidance to help private equity firms develop three pillars for ESG transformation, supporting the evolution of private equity firms into ESG change-drivers:
- Motivation
- Knowledge & Control
- Action & Leadership
The report is based on a quantitative survey of thirty- eight growth capital firms, five interviews with private equity investment professionals, and a comprehensive literature review.
The research was conducted by Amrop Netherlands, supported by the Nederlandse Vereniging van Participatiemaatschappijen (NVP).
The project was led by Amrop Partners Roland Theuws and Eelco van Eijck, with the input of NVP Director Tjarda Molenaar and Deputy Managing Director Marc van Voorst tot Voorst. They were further supported by Managing Consultant Florian Gloger from the Vrije Universiteit Amsterdam.
As sustainability and ESG aspects are playing an increasingly important role in the selection and management of companies, this means considering factors such as energy consumption, climate, health, diversity, safety and good corporate governance.
ESG is about finding a balance between financial/economic results, transparency, social interests and the environment. There is increasing evidence that a good balance leads to better results for a company, its investors and society.
How can the private equity sector use its pivotal economic position to shape the sustainable businesses of tomorrow and fulfil its social responsibilities?
This report delivers observations and guidance to help private equity firms develop three pillars for ESG transformation.
Knowledge & Control
The majority of private equity firms are operating in the dark when it comes to the performance of their investments and the value creation chains of their portfolio companies. It is crucial to implement data driven, corporate ESG controlling systems. Getting access to ESG data processing knowledge will be a difficult but necessary first step.
Motivation
We can distinguish between intrinsic motivational drivers (such as personal beliefs, investor demands and current market assessments) and extrinsic motivational drivers (such as compliance, political and public pressure). Intrinsic motivation tends to be more strongly developed than extrinsic motivation. Intrinsic motivation can be cultivated by better communication among stakeholders. Extrinsic drivers will naturally and autonomously become stronger over time, but their evolution could be accelerated by stakeholder requirements.
Action & Leadership
Training, mentoring and connecting the leaders of portfolio companies are all key to implementing an effective ESG strategy. Moreover, companies that are both financially and sustainably driven need a different leadership style, one that is not just commercially smart, but wise (ethical, sustainable and responsible). This is fully explored in the Amrop study: ‘Wise Decision-Making: Stepping Up to Sustainable Business Performance’.
7 Topline Findings
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The private equity sector has a high intrinsic motivation to commit to ESG change.
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There are strong environmental incentives and growing political pressure to take a front-runner role in ESG-focussed investing.
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The fragmented structure of Dutch private equity continues to create challenges for the development of ESG-KPIs
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Monitoring and reporting are the Achilles’ heel of effective ESG change.
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Be concrete in ESG governance.
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Signalling is a powerful tool to shape an ESG-driven portfolio acquisition process.
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Developing and connecting wise leaders is key to aligning financial and ESG targets.
Full Report
Read the full Study here.
Download the Report