ESG and Private Equity: When sustainability becomes a performance driver

ESG, from compliance to value creation

The evolution of ESG perception in Private Equity illustrates a remarkable maturation of the sector. Until five years ago, the integration of sustainability criteria was mainly a matter of regulatory compliance and marketing positioning. Today, 84% of European managers are considered “excellent” or “good” in their ESG approach, compared to only 50% in the United States.

This European increase can be explained by the early expectation of regulatory constraints. The SFDR (Sustainable Finance Disclosure Regulation) regulation and the European taxonomy have prompted actors to develop in-depth expertise in terms of environmental and social impact. Funds classified Article 8 or Article 9 must annually collect accurate data on CO2 emissions, the feminization of boards of directors and many other indicators.

The most revolutionary aspect lies in the transformation of ESG into an operational driver of performance. Rather than being subject to these constraints, the most innovative managers use ESG analysis to identify unknown sources of value: energy optimization, improvement of working conditions, strengthening governance, diversification of management teams.

Climate change: from awareness to action

Taking climate change into account is the most spectacular development in recent years. 47% of private equity fund managers are now integrating climate change into their ESG policies, compared to only 34% in 2021. This increase of 13 points in three years illustrates the acceleration of climate awareness.

Climate risk assessment follows a similar dynamic with 43% of managers assessing these risks in 2022, compared to 32% in 2021. This evolution reflects an increasingly sophisticated approach integrating transition risks (regulatory, technological, market) and physical risks (extreme climate events, sea level rise).

Monitoring greenhouse gas emissions is becoming the norm with 40% of managers actively monitoring these indicators, compared to 28% in 2021. This systematic measurement makes it possible to identify the most exposed companies and to define credible decarbonization trajectories, creating a sustainable competitive advantage.

Impact sectors: health and renewable energies in the lead

The health sector is a perfect example of the convergence between societal impact and financial performance. Investments in health make it possible to improve access to care while generating attractive returns, as demonstrated by the example of Breitling supported by CVC Capital Partners, which has completely revised its procurement methods using recycled materials.

This “impact-first” approach generates a virtuous circle: improving brand image, reducing operational costs, facilitating access to green financing, attracting talent who is sensitive to sustainability issues. With 61% of French people integrating sustainability criteria into their purchasing decisions, alignment with these values is becoming a factor of commercial competitiveness.

Renewable energies confirm their status as a priority sector with more than 50% of infrastructure transactions now involving clean energy and energy storage. The record investments of 2 trillion dollars in clean energy in 2024 are a testament to this accelerated transition to a sustainable energy model.

Operational challenges: data quality at the heart of the issues

The concrete implementation of ESG strategies faces significant technical challenges, particularly in terms of data collection and reliability. One of the main obstacles remains the quality and granularity of the information collected from participations. Managers now prefer a limited number of key, relevant and verifiable indicators, rather than an exhaustive but unreliable collection.

This quest for reliable data requires significant investments in information systems and team training. Many managers use specialized software to automate collection and standardize ESG reporting. This harmonization of processes is becoming crucial to ensure the comparability of performances between participations and vintages.

The audit and verification of ESG data are emerging as critical issues. The involvement of independent third party experts is becoming the norm to guarantee the credibility of reports and avoid the risks of “greenwashing”. This requirement of transparency reinforces the confidence of investors but generates significant additional operational costs.

Impact on valuations and exits

ESG integration directly influences valuations and exit strategies. Companies with superior ESG performance generally benefit from higher valuation multiples during disposals. This sustainability award reflects the expectation of better operational performance and increased resilience in the face of external shocks.

Strategic investors and acquiring funds systematically incorporate ESG analysis into their due diligence. Poor governance, inadequate environmental practices or social issues can be blocking factors or lead to significant discounts. On the other hand, a mature and documented ESG strategy facilitates divestiture processes.

IPOs (IPOs) of companies supported by ESG funds generally benefit from favorable market reception. Listed institutional investors, subject to the same sustainability constraints, prefer companies that are aligned with their ESG objectives, facilitating secondary liquidity and optimizing valuations.

Perspectives: towards a standardization of practices

The gradual standardization of ESG practices is the major challenge of the coming years. The harmonization of metrics, calculation methodologies and reporting standards will allow better comparability of performances and facilitate the allocation decisions of investors. This European standardization could constitute a competitive advantage compared to other less advanced regions.

Technological innovation is accelerating this evolution with the emergence of artificial intelligence tools for automated ESG analysis. These solutions make it possible to process considerable volumes of unstructured data and to identify complex correlations between sustainable practices and financial performance.

Conclusion: ESG as the DNA of tomorrow's Private Equity

The integration of ESG criteria in Private Equity now goes beyond the simple fashion effect to become a structuring element in value creation. This profound transformation of investment models reflects the evolution of societal and regulatory expectations, but also the realization that sustainability and financial performance are complementary. Players who know how to master this ESG dimension will have a sustainable competitive advantage in the European private equity ecosystem.

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