Why do private equity firms build sustainability strategies?

Sustainability has increasingly become a key focus for private equity firms. Having a sustainability strategy in place is not only a compliance requirement, but also a way to stay competitive in the market and attract top talent.

If your firm hasn’t yet taken the plunge into tracking and reporting its ESG data, here are a few simple reasons to get started sooner rather than later.

One of the main reasons for private equity firms to have a sustainability strategy is compliance. With the introduction of European regulations such as the Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD) (applicable to portfolio companies), reporting on Environmental, Social and Governance (ESG) stakes is becoming mandatory. Having a framework in place to address these regulations can ease the task of compliance and ensure that all necessary information is readily available.

In the U.S., the lack of regulatory requirements means that it’s not necessarily mandatory for private markets investors to disclose ESG information. However, many GPs do business in Europe, have European assets in their portfolios, or employ European companies as part of their supply chain.

Another important reason is market evolution. More and more companies are implementing sustainability strategies, making it a standard and criteria for investors. By having a sustainability strategy in place, private equity firms can stay ahead of the competition and attract more investors who are interested in sustainable investments.

By demonstrating to GPs and LPs that the firm takes ESG data into account, private equity firms can answer growing expectations from shareholders who themselves are subject to ESG regulations.

Some investors are not only asking for data but also asking for portfolio company data. Even though they have invested in a fund, they don’t just want consolidated data, they want to get into the granular detail from the bottom up. There is a real hunger for data in the private markets, unlike the public markets where we now arguably have too much data.

Sustainability strategies can also lead to better employee engagement and improve an employer’s brand. By showing employees that the firm prioritizes ESG data, they may feel more committed to the company and more motivated to work towards its goals. Additionally, an improved employer’s brand may attract top talent who are interested in working for a company that cares about sustainability. This is particularly true of younger generations just entering the workforce, 90% of whom are willing to earn less money to do more meaningful work. 

Lastly, by enhancing innovation and anticipating market trends, private equity firms can stay ahead of the competition and be better positioned to capitalize on new opportunities.

Overall, having a sustainability strategy in place is becoming increasingly important for private equity firms, as it helps them to stay compliant, stay competitive, and create value for all stakeholders.