Unlocking ESG as a strategic differentiator for private equity

PARTNER CONTENT

By Steve Cain
ESG Product Specialist at Novata

Environmental, social, and governance (ESG) considerations are here to stay. Over the past 10 years, pushed by regulation and risk management concerns, ESG strategies have evolved from a nice-to-have corporate activity into a strategic necessity all private market participants must monitor and address. In fact, a 2023 survey from the Harvard Law School Forum on Corporate Governance showed that 63% of European investors probe prospective general partners on their ESG approach. 

As ESG priorities expand within the private equity industry, understanding its dynamics and addressing its challenges is essential for firms aiming to get ahead in this evolving landscape. A new report released by Novata and Oliver Wyman uncovers insights from 20 top European private equity firms on how they handle ESG policies and challenges they’re facing as it relates to ESG. The participating firms collectively represent about 30% of PE assets under management in Europe.

According to the report, the top ESG challenges private equity firms are facing include:

• Inability to track the correlation between ESG and financial performance, even though 100% of firms surveyed indicated they see ways in which ESG contributes to financial performance
• The resource-intensive nature of managing ESG metrics across diverse portfolios, which is a problem confronting generally lean ESG teams at PE firms
• The burden of meeting diverse demands for data from LPs on top of regulatory requirements, which takes away resources that could be better spent on initiatives to expand ESG’s strategic role
• The volume of ESG metrics and confusion around deciding what metrics to track, which complicates the use of ESG data to inform in investment decisions

In addition, the evolution of European regulatory requirements, including SFDR and CSRD, are increasingly shaping the ESG landscape for PE firms and raising questions about the industry’s proactive role in setting sustainability agendas. The reliance on regulators can potentially impact the industry’s ability to use ESG for value creation.

Despite these challenges, firms that can wield sustainability as a competitive edge in coming years will enjoy stronger reputations with limited partners (LPs), the public, regulators, the corporate community, and media. Appropriately leveraging ESG data is an important step in this process. Among its many commercial upsides, embracing ESG data as a strategic competitive edge can be expected over time to reduce operational inefficiencies, increase value creation opportunities and risk management, and better prepare firms for regulatory changes.

To learn more about how general partners are tackling these ESG-related challenges and moving beyond the basics to unlock ESG and sustainability as a strategic differentiator, read Novata and Oliver Wyman’s report.

Steve Cain, ESG Product Specialist at Novata – Steve serves as a subject matter expert on trends in ESG standards development, regulatory changes, and best practices. Steve collaborates with product teams, standard setters, and partners to develop new support modules and leads Novata’s cross-functional working group on carbon accounting excellence.