The ESG Review: Is it private equity’s time to rise above ESG’s shortcomings?

Amidst all the furore over how best to standardise and structure ESG reporting for large public companies, the part that private equity firms play in raising the bar has been gathering steam in recent months.

Until now, much of the discussion has been about how and why private equity investors in particular will need a more rigorous and transparent approach to reporting, so that there is a common methodology for understanding the ESG-related value of their existing and prospective portfolio companies.

But looking at a handful of announcements and articles in the past week, there seems to be a growing sense that private equity can play a role that rises above the ongoing debate about how best to report the facts to instill best practice models that help to create broad benefits.

Chief amongst them was a World Economic Forum opinion piece on why private equity should “lead the charge” on ESG strategy.

“While metrics and compliance are clearly important, the private equity sector is missing a far greater opportunity within our reach: we can lead in the creation and propagation of ESG best practices across global portfolios,” it says.

But why would private equity companies want to do so, a cynic might say? Surely their interest is often in taking companies out of public ownership and into private hands where there are fewer restrictions on change, and refashioning them to increase their value? The WEF piece makes the point that operational excellence - so often central to what a private equity house does to improve the value of a business - is actually the common ground with ESG-led change, and arguably private equity is in good position to nurture best practice because of how it sees to operate and engage across stakeholder groups.

And from a communications perspective, there is this: “They understand that following a responsible ESG strategy has the potential to do more than reduce reputational risks, thereby creating the perception of a well-led and managed company with a concomitant premium valuation.”

It’s an interesting perspective, echoed by this earlier piece from INSEAD, and perhaps the first that illustrates how by rising above the raw need to improve reporting, ESG strategy and definitive execution against it can be brought to the fore by those with great focus on enhancing value - and that reputation can play a central part in it.

Just a few weeks ago, this KPMG report spotlighted ways in which ESG is increasingly important to the private equity sector, while Bloomberg covered Apollo and Oaktree joining the private equity world’s push to up the ante on ESG reporting.

And as the NASDAQ web site covered a week or so ago, private equity might now be moving the ESG reporting needle to, above and beyond a focus on best practice.

Calls for clearer and more meaningful account frameworks will continue, but as companies hold themselves to account on time-sensitive change commitment, greater definition of best practice - and the reputation-forming impact such action can have - looks set to rise up the agenda.

The ESG News Review is written by Steve Earl, a Partner at BOLDT

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