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There’s no question that environmental, social and corporate governance issues have become more important to limited partners over the years. Tragic accidents such as fires in factories in Bangladesh and Vietnam have increased scrutiny on how private equity firms’ portfolio companies conduct business. Faced with the prospect of potentially losing limited partners, private equity firms are taking notice.
The issue of safety at factories is just one of many that have brought ESG to the forefront for U.S. private equity firms. With limited partners being very selective about which funds they invest in, they are considering firms that take ESG issues into account before sending dollars out the door. General partners are taking notice. Consider this: When PitchBook conducted its inaugural ESG survey of private equity professionals in 2012, 49 percent of general partner respondents did not have an ESG program at the firm and had no plans to create one. However, just a year later, 60 percent of GPs reported working at a firm with an established ESG program and another 26 percent either have an ESG program in development or a plan to create one in the near future.
“Private equity firms are starting to focus more intensively on ESG issues, which is a positive development for both economic and social/environmental reasons. While much of the perception of ESG is that the benefits are primarily social and environmental, the reality is that significant bottom-line improvement often materializes at firms with sound ESG practices,” says Josh Sobeck, a partner at 747 Capital, a fund of funds that regularly reviews ESG policies at the private equity firms in which it invests.
Daniel Galante is Grant Thornton’s national managing partner of transaction advisory services. He has extensive experience serving as an adviser to companies in the United States and Europe in buy-side and sell-side transactions with private equity investors.