PE firms reveal concerns on impact measurement, lack of standardised data, and greenwashing amid fast-rising ESG focus

ESG valuations

The rapid acceleration of ESG as a major focus for private equity investors around the world is highlighted by the results of a new survey released this week by corporate and fund solutions provider Intertrust.

The study – which interviewed around 150 private equity fund managers across Europe, North America and Asia in April to identify the risks and opportunities facing the private equity industry in the coming 12-24 months – revealed that almost 90 per cent of PE investors plan to step up their efforts to manage and measure ESG performance in their portfolio companies over the next two years.

However, nearly half of the survey respondents – 46 per cent – are concerned that, by using their own ESG scoring methodologies, they leave themselves open to accusations of greenwashing.

GPs highlighted the three biggest obstacles to implementing ESG programmes at a portfolio company level as quantifying and monitoring their impact; cost and resource constraints; and managing multiple sources of ESG data.

Underlining the complexities involved in the process, GPs predict that it will take over five years before they can produce standardised ESG data across their portfolio companies. According to Intertrust, this will put the onus on tech-enabled service providers to deliver flexible solutions that can provide independent ESG assessments and benchmarks as well as offer GPs flexibility in adhering to different standards that are constantly changing.

While the majority (54 per cent) of GPs believe they will ultimately benefit from a greater focus on ESG over the coming two years, a sizeable minority (32 per cent) are pessimistic about what they will receive in return. Moreover, only 27 per cent of the respondents believe that the coronavirus will lead to a greater focus on ESG investing as the role of business in society comes under increasing scrutiny. 

The findings, which form part of Intertrust’s Global Private Equity Survey 2020, chime with a live audience poll conducted during the PEWlive North America Digital Summit earlier this month – in which just over 50 per cent of delegates said they thought ESG would have either a “substantial” or “meaningful” impact on asset valuations over the next five years, while 30 per cent believed the impact would only be “moderate”.

Chitra Baskar, Global Head of Funds at Intertrust, said: “GPs are expanding their measurement of ESG behaviours within each of their portfolio companies due to investors seeing correlations between excess returns, sustainability, diversity and equality, to name a few.”

She added: “Although support grows for the Principles of Responsible Investment (PRI), regulators have yet to agree on independent reporting standards. Without these standards, private equity remains subject to greenwashing accusations. This pressure underlies GPs’ support for their portfolio companies and their ESG impact reporting.”