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ESG: 3 Proactive steps your PE firm should be taking


December 14, 2021

By: Delaney Walker

ESG has grown in importance and prominence amongst the investing community in the past few months. After a year and a half of unprecedented times, investors have found that they can help cause positive change by placing a focus on ESG. Additionally, investors have found that ESG criteria often points to improved long-term returns, with roughly 53% of institutional investors agreeing that companies with better ESG track records generate better investment returns. 

With the importance of ESG rising in terms of investment evaluation across the board, we are hearing from our more than 500 private equity firm clients that questions on ESG policies and reporting are increasingly coming from LPs. Before you start raising your next fund, here are three steps you can take to start being proactive in being able to answer any questions that may come.

1) Develop policies at the fund level. 

If you don’t have them already, the best place to start with ESG is to develop policies at the fund level. These policies can serve as a guiding light for how actions can be taken throughout the firm, down into portco investing, to help advance ESG efforts. 

Our clients have leveraged third-party ESG experts to help them develop and implement ESG strategies for the first time. 

2) Conduct diligence on your deals. 

ESG diligence should now be part of the routine diligence process when assessing any target. However, ESG criteria varies by industry and is extremely trade-specific, so it is most valuable to have an outside resource do this work for you. In fact, we saw this trend occur so much in Q3, that ESG diligence crept into the top 10 of the BluWave Private Equity Due Diligence Index for the first time ever.  

Additionally, third-party ESG diligence resources have tools and scorecards they use to audit companies against SASB standards, allowing for an easy way for you to measure your target company against other companies in the same field.

3) Monitor progress against ESG targets at both the fund & portco level. 

 LPs are no longer just going to look for ESG policies to be in place, they are going to look to see if action is being taken against these policies. The best way to prove this is by having metrics that show progress, and we have third-party resources in our network that will help you build in ways to track them over time. 

At the portco level, these resources will allow you to collect and visualize your ESG data, making the impact of your efforts easy to understand, demonstrate to LPs, and analyze.  These resources will also allow you to implement software tools that will make tracking and monitoring your efforts more automated.

 

No matter your ESG need, we have the resources to help you streamline your efforts and prove your action. Contact us to schedule a scoping call, we’d be happy to hop on the phone and quickly get started in providing you with the solutions you need.