The nature of corporate value creation is changing rapidly as ESG market opportunities accelerate and ESG risks intensify across industries. The recent survey of deal-makers conducted by the Association for Corporate Growth and sponsored by S&P Global Market Intelligence shows this also holds true for private equity. Here, S&P provides a deeper analysis of how respondents answered some of the key questions that were asked.
Q. Which aspect of ESG does your firm care more about?
Interestingly, 39% of respondents to this question point to the “S,” or social impact component of ESG, which includes how businesses interact with and care for their workforces, communities and geopolitical environments. The COVID-19 pandemic has certainly pushed the “S” into the spotlight, highlighting a range of social issues—from access to health care to occupational health and safety—that present important considerations for private equity investors.
Social impact can be the most difficult element for investors to assess, as it is often perceived as less tangible than environmental and governance factors (the “E” and “G” in ESG, respectively), and data on how the “S” impacts company performance is less mature.1 Social factors are becoming more material for many industries, however, as they are increasingly being linked to a company’s reputation and brand equity. As such, the investment community is pushing Wall Street’s biggest data providers for more information.2
Q. How do you measure the impact of ESG investing?
Over one-third (38%) responding to this question said they use the United Nations Sustainable Development Goals (SDGs) to measure ESG impact. Formally adopted by 193 countries in September 2015, the SDGs outline a set of objectives to be achieved by 2030 that aim to end poverty, hunger and inequality, while tackling climate change, improving health and education, and spurring economic growth. According to the Business and Sustainable Development Commission, putting the SDGs at the heart of the world’s economic strategy could unlock $12 trillion in opportunities and 380 million jobs a year by 2030.3
Other approaches are being used by 61% of firms responding to this question. Over the past five years, more companies across industries have been publishing sustainability reports, with 90% of the largest 500 companies in the U.S. reporting in 2019—an 11% increase since 2015.4 A range of frameworks are being used, including those provided by the Taskforce on Climate-related Financial Disclosures (TCFD) and Global Reporting Initiative (GRI).
Q. What is the next frontier of ESG data?
Almost half (48%) responding to this question said positive impact analytics will be the next area of focus, with 20% already reporting on this for their investments. One way to measure positive impact involves looking at the contribution a company is making to the SDGs, which tends to be through the sale of SDG-aligned products and services. Currently, 71% of the 500 largest U.S. companies and 63% of the 1,200 largest global companies have business models that support the SDGs.5
Q. How do you incorporate ESG?
Most respondents (58%) point to due diligence/investment risk analysis ex-ante, where ESG considerations are embedded into investment policy, analysis and decision-making. There are also increasing requirements for ESG reporting, including disclosure of the ESG risk and opportunity profile of portfolio companies, the approach to assessing environmental and social benefits created by portfolio companies, as well as how the risks and opportunities of climate change posed to portfolio companies are being assessed.
The survey results show that ESG is gaining momentum at private equity firms, with two-thirds (66%) of respondents having guiding principles in place, or in the works. With more attention paid to the perceived lack of ESG data on private assets and financial materiality for the industry, sustainability issues should continue to gain a stronger voice in the decision-making process of sponsors and their investors.