How Private Equity can make ESG a competitive advantage

How PE is driving ESG more competitively

Environmental, social and governance (ESG) practices continue to be a hot topic in private equity. As momentum around ESG increases, leading PE firms are planning, implementing, and reporting the impacts of ESG strategies.

Although ESG has gained popularity, the movement has taken a long time before becoming the next big thing. In the last two decades, scandals and market crashes have brought public attention to the effects of unsustainable business practices. Events like the Enron scandal, the dot-com bubble crash, and the BP oil spill motivated firms, investors and governments to create a blueprint for business practices that limit damage to the environment, the public, employees and shareholders.

“Investors are now much more attuned to concerns like diversity and inclusion, gender pay structure, donation programs, board composition, factory conditions, and mitigating climate risks,” said Stacey Relton, Sanne Head of North America.

Such worldwide movements for change like the Global Reporting Initiative (GRI), United Nations-supported Principles for Responsible Investment (PRI) and the Task Force for Climate-Related Financial Disclosures (TCFD) furthered the foundation of the movement. The 26th United Nations Conference of the Parties (COP26) is taking place in Glasgow this month, where Governments will meet with the aim of accelerating action towards the goals of the Paris Agreement. The ESG agenda is now truly front and center.

Firms and investors increasingly recognize that incorporating sustainability factors in investment decision-making is required for longer-term value creation and preservation. Extreme weather events, human rights violations, and weak corporate governance can negatively impact shareholder value and investment returns. Plus, studies have confirmed a positive correlation between high sustainability companies and positive equity returns.

As a result, funds with a thoughtful strategy and assistance from stakeholders and consultants may have a competitive advantage. As stakeholders and regulators make ESG a priority, funds should take a proactive approach to evaluate and implement ESG initiatives. Looking at regulation globally, a lot of progress has happened in the last year, whether that’s new regulations going live or new regulations out on consultations. Many of these regulations and guidelines are expected to come into force in the next 12 to 18 months. It is important for investment managers to understand the requirement to prepare in advance. Below are action items to consider:

Garner support from senior management

Internal advocacy, buy-in and focus are critical to success. Increased awareness of ESG issues globally has led to a demand from investors and stakeholders for increased transparency and reporting. Investors are actively seeking opportunities with managers who demonstrate strong leadership in ESG factors.

Engage ESG advisors to assist in developing a firm-wide strategy

An advisor can provide a range of services to support the firm’s efforts. ESG professionals assist with research and insights, as well as provide innovative solutions for ESG risks and opportunities. They can help management formulate their ESG strategy, policies and procedures and understand reporting frameworks.

Selecting the right reporting framework

An ESG materiality assessment is a tool used to identify and prioritize ESG issues that are the most critical to the firm. This is accomplished by evaluating each ESG issue based on two factors: potential impact on the firm and stakeholder value. It is designed to help management understand the relative importance of specific ESG and sustainability topics.

Develop a data-gathering strategy for regular ESG reporting to investors

After identifying the most important metrics per the materiality analysis, firms can collect data points and present them to investors. A sustainability software platform, like Sanne Rio, can provide accessible reporting and sustainability expertise based on custom KPIs or built-in reporting frameworks.

Become a signatory of one or more ESG related institutions

Organizations like the PRI support signatories in acting on their ESG strategy. These associations allow for collaboration with other industry players and participation in forums. Further, the accreditation may prove valuable to current and potential LPs and investors.

Environmental, social and governance considerations are required for longer-term value creation and preservation in private equity and across the alternative investment universe.  Managers are also increasingly finding that ESG and sustainability policies are important in attracting investor capital. Fund Managers can effectively navigate implementing ESG through engaging experts, conducting materiality analysis, and selecting an appropriate reporting framework, benchmarks and targets. Thereafter, utilizing an effective tool to assist with data-gathering and reporting is essential for effective monitoring.  Managers may further seek the kudos of joining ESG related organizations or bodies.

“We need new and innovative solutions to our ESG problems. The alternatives investment industry finds itself in a unique position not just to unlock value, but also manifest positive change in ESG,” said Karlien De Bruin, Sanne Global Head of ESG.


How Sanne can help

Sanne offers access to ESG advisory experts with strong experience in ESG strategy development, regulatory gap analysis, materiality analysis, reporting frameworks, data strategies and data analysis.

Through Sanne’s partnership with Rio ESG, we provide an online ESG reporting platform, independent verification of ESG reporting and compliance. We can provide our clients and their investors with expert data analysis, governance, and education tools.


Contact us to learn more about Sanne’s ESG services.