ESG IN PRIVATE EQUITY - Explore our new Adveq Applied Research Series report:
Monday, February 23, 2015
ESG MOVING OUT OF THE COMPLIANCE ROOM AND INTO THE HEART OF THE INVESTMENT PROCESS
IOANNIS IOANNOU, FRANCESCA CORNELLI, THOMAS ZHANG
Report and slides
‘ESG moving out of the compliance room and into the heart of the investment process was co-authored by Francesca Cornelli and Ioannis Ioannou at London Business School’s Coller Institute of Private Equity, supported by Adveq, the globally active private markets investor.
The findings were based upon a sample of 42 private equity firms, representing a broad geographic and sector focus and with a total of over $640 billion of assets under management. The report represents one of the first comprehensive surveys on the role of ESG in the investment practices of the private equity industry.
London, UK, 23 February 2015: Institutional investors are increasingly demanding that private equity firms adopt ESG policies in their investment processes, according to new research conducted by the London Business School’s Coller Institute of Private Equity and supported by Adveq, the private equity investor.
The study, based on responses from 42 private equity firms with collective assets under management of more than $640 billion, reveals that ESG is now a core value creation strategy at private equity firms. The London Business School authors, Professor Francesca Cornelli and Dr Ioannis Ioannou, find growing pressure from LPs is hastening the movement of ESG from being purely a compliance function to a key part of the investment process. The study shows that larger firms are feeling this pressure more acutely with 85% of the larger firms surveyed commenting that pressure from LPs to integrate ESG policies into everyday working practices is intensifying.
The research highlights that support for wider adoption of ESG is coming from the boardroom with C-suite executives driving new policies. The results also reveal that responsibility for implementing ESG policies is moving out of the compliance room and is now firmly in the hands of investment professionals.
Ioannis Ioannou, Assistant Professor of Strategy and Entrepreneurship, London Business School, said:
“The private equity industry is increasingly placing greater importance to ESG, moving it from a purely compliance and risk mitigating strategy to a key long-term strategy through which private equity firms pursue value creation.
“Board members and C-Suite executives are taking the lead in making sure that their companies are implementing ESG policies throughout the whole investment process, and that they are structurally embedded throughout the organization.”
The study finds that while there is increasing adoption of ESG policies there are significant barriers to implementation, most notably the difficulty of collecting the necessary data. The idiosyncratic nature of ESG data itself as well as the comparability across investments are other issues that the respondents highlighted as presenting barriers to ESG implementation.
The research reveals that pressures to implement ESG policies are most acutely felt in Europe, while the MENALA (Middle East, Northern Africa and Latin America) region appears to feel less pressure from investors and regulators, reflecting the low penetration of socially responsible investment.
The growing importance of ESG is also evidenced by the fact that firms say that they are now using ESG on purchase of portfolio companies, right through to exit. Only 26% of the respondents said that they implemented ESG policies only at the exit stage.
We gratefully acknowledge the generous financial support for this research provided by Adveq Management.
For a list of all research that has been published under the Adveq Applied Research Series please click here.
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