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How Mid-Cap PE Funds and Their Portfolio Companies Can Achieve ESG Goals

Five steps to creating an ESG planning framework for every company

How Mid-Cap PE Funds and Their Portfolio Companies Can Achieve ESG Goals

Private equity firms often struggle to balance two seemingly conflicting goals: generating a return for investors and meeting the environmental, social and governance (ESG) goals of their stakeholders.

PwC’s recent Global PE Responsible Investment Survey found that 37% of respondents have turned down an investment opportunity because of ESG concerns. These range from portfolio companies pushing unrealistic net- zero requirements down their supply chains, to competing with firms with more mature ESG capabilities.

This section of the report is sponsored by PwC US and originally appeared in Middle Market DealMaker’s Summer 2022 issue.

Read the full story in the archive.

By setting the right priorities and with adequate planning, however, PE firms need not miss these opportunities.

Start by gathering good data and conducting a diagnostic on your entire portfolio. Getting consistent data may be challenging, so look for creative solutions. For example, one fund relies on its payroll processing company to provide data that informs diversity and inclusion goals for all its portfolio companies. Others are turning to their cloud service providers to help them gather and analyze ESG data. Once you have the data, create an ESG diagnostic to assess how each of your companies is managing its ESG risks.

Related content: How Public Scrutiny of ESG Impacts Private Equity’s Investment Strategy

Begin setting your priorities by examining the portfolio companies that are closest to exit. Next, address companies in industries with hot-button ESG concerns. Then, look at the other industries that may have less visible E, S and G impacts lurking beneath the surface. Finally, look at newly acquired companies. With the longest timeline to exit, these portfolio companies can shine relative to peers with the right focus and investment.

Here’s an ESG planning framework that you can adapt from company to company:

  1. Assess where you are now. Look for areas where your ESG investments are linked to revenue growth, such as eco-friendly production processes that win over consumers. Be just as vigilant in finding areas where performance is lagging.
  2. Define your goals based on what ESG success looks like for your stakeholders. To form this view, understand what your industry’s investors care most about. Define your level of ambition so you can align your organization around your goals.
  3. Identify options to deliver your ESG strategy. Use data to track and analyze performance and get the most from your ESG investment.
  4. Build a business case for ESG investment. Demonstrating knowledge of the market’s perspective on ESG will go a long way toward winning executive buy-in on ESG goals. It’s critical to align the operating models of the portfolio companies and get their CEOs on the same page as your fund.
  5. Tell your story. Report ESG performance through investor-grade standards. As you develop your reporting, remember to take credit for what you’re doing well, and make it clear what you’re still working on.

Don’t wait. Any portfolio company that can provide investors and other stakeholders the assurance that it’s meeting market-established ESG expectations can create tremendous value for a PE firm.

Related content: Why ESG Is Here to Stay

Mark Watermasysk, Private Equity Trust Solutions Leader, leads a PwC team focused on increasing the trust and collaboration between PE funds of all sizes and their portfolio companies through coordinated compliance and consulting solutions.