ESG Factor Integration into Private Equity

Maria Cristina Zaccone,Matteo Pedrini

doi:10.3390/su12145725

Abstract

Although more and more private equity (PE) firms are integrating environmental, social, and governance (ESG) factors into their investment strategies, there is no clear understanding of their reasons, the details of their activities, the tools they use or the barriers they face. Our study covers these gaps and provides an overview of current trends. We adopted a mixed-method approach, using both qualitative and quantitative data. We first interviewed ESG and PE experts and then submitted a survey to top PE players. Most PE firms integrate ESG issues because investors and other stakeholders pay increasing attention to them. We found that the tools used to assess ESG factors are checklists and that only a few PE firms used external advice from industry experts. Among the main barriers that PE firms face are difficulties in finding information and the lack of a comprehensive way to measure ESG issues. Our findings reveal that PE firms have two main approaches to ESG integration—risk management and value creation—and that the former is dominant. We contribute to the literature by explaining ESG integration in the PE industry and showing that an opportunity for value creation is being missed.

Highlights

Environmental, social, and governance factors (ESG) are more salient than ever
Our study provides a comprehensive understanding of the motivations behind the decision to integrate ESG factors into private equity (PE) activities, the tools firms use and the barriers they face during integration
The interviews revealed that PE firms have already started incorporating ESG factors into their activities and that a growing number of PE firms have “an internal committee responsible for ESG topics, with both top managers from investment teams and support functions participating”

Summary

Introduction

Corporations are increasingly experiencing external pressure to change their behavior and focus on ESG factor integration into their business activities. Manufacturing firms inevitably generate impacts on the surrounding natural environment through their production activities, which can deplete natural resources, raise global warming, and pollute air and water. Business activities inevitably generate an impact on people, such as on their employees’ happiness, fulfilment, and safety. All these aspects have been earning the attention of a wide audience, and managing ESG factors is becoming an imperative that companies cannot avoid, as evident in the growing number of companies working towards responsible environmental footprints, minimizing their carbon emissions, promoting equal opportunities, and work-like balance and guaranteeing human rights [12,13,14]

Objectives

Methods

Results