Over the past year or so, much has been made in the media about the risk of an ESG investment bubble and, in particular, how more robust and meaningful reporting is needed.
But 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 that discussion has been about how and why private equity investors will need more rigorous and transparent reporting, so that there is a common methodology for understanding what part ESG-led action is playing in the value of their existing and prospective portfolio companies.
But there now 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.
A recent World Economic Forum opinion piece on why private equity should “lead the charge” on ESG strategy in a case in point.
“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, given that their interests often lie in taking companies out of public ownership 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.”