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An Analysis of PE Firms leading the way on ESG

Harvard Business Review identifies 3 ways sophisticated PE firms approach ESG:

  1. Integrate ESG throughout the entire deal lifecycle
  2. Increase transparency around ESG data
  3. Improve ESG capability at the portfolio company level
Integrate ESG throughout the deal lifecycle (for real)
The old way of incorporating ESG early in the deal was to ask the company to answer a few questions about ESG. In some cases, they were literally checking a box to cover risk and compliance concerns.
This may have satisfied LPs in the past, but not anymore. There is a new (and much better) way to approach ESG during initial screening and due diligence.
  • Identify how well management understands ESG issues that are relevant to their business
* If risks are not well understood, it is the job of the GP to help guide and educate the company. An unwillingness by the company to engage in that exercise is telling. Consider this along with other evaluation criteria.
  • Identify actionable steps that can increase value through better ESG and impact performance.
* Document the ESG action plan as part of the deal. This defines the 5-10 initiatives the company will do to improve ESG. The right technology partner simplifies this. They provide examples of these initiatives broken down by industry and goal.
Increase Transparency around ESG Data
Transparency means easier access to relevant ESG data.
The old way:
  • Collect data from portfolio companies via spreadsheet
  • Spend months scrubbing, collating, and analyzing data
  • Only a few people have visibility into the data
  • Publish annual report
The modern way:
  • Leverage technology to simplify data collection
  • Access pre-built reports and dashboards for analysis
  • Provide on-demand access to data to a broader audience.
  • Focus on identifying ways to improve ESG
Improve ESG performance at the portfolio company level
The modern approach to ESG data enables the firm to focus on improving ESG across the portfolio. This effort is often led by impact and/or portfolio operations teams. At leading firms, partners also participate.
Remember the 5-10 impact initiatives you identified early in the deal lifecycle? Leading firms are active in managing this ESG plan throughout the hold period.
This is where many firms fall behind.
Private equity firms that work with their portfolio companies see greater value creation. They conduct more frequent check-ins. They collect data. They work with the portfolio company to hit their goals. The right technology simplifies this entire process.
Historically, there were a finite number of firms leading the way on ESG. Most firms fell well behind market leaders. But, in recent years, more firms are wising up to the importance of ESG and impact.
Per Harvard Business Review:
“Five years ago there were clear leaders, with laggards significantly behind. Today the gap is narrowing.”
Distinguishing yourself as an ESG forward firm is not as difficult as it may seem.
What's a good first step?
Adopt the On-Demand Impact Transparency Framework by Corecentra. This closed-loop approach maximizes value without adding a ton of overhead.

Contact us today to learn more about On-Demand Impact Transparency

Not convinced you need to take ESG and impact seriously? Your Limited Partners and target portfolio companies disagree. Learn more about their respective viewpoints in:

Growing demand from LP's means Private Equity needs to prioritize ESG

Portfolio Companies demand an ESG focus

.The Harvard Business Review article referenced herein can be found here