16 Jan 2018
As global leaders are addressing the sustainability agenda, accordingly environmental, social and governance (ESG) topics in the investment process are becoming more important. Yet many investors still worry that responsible investment might mean lower returns.
According to a recent survey from Schroders, 44% of 500 institutional investors around the world – and 47% in Europe – are concerned that investing sustainably will hurt performance. This runs counter to a growing body of evidence that sustainable practices can drive financial outperformance.
Today $23 trillion of global assets are managed under responsible investment strategies, an increase of 25% on 2014. Responsible investment strategies represent 26% of the world’s professionally managed assets, according to the Global Sustainable Investment Council, with Europe leading the way at over half the region’s total – $12 trillion.
Many general partners and investors know anecdotally or from experience that higher ESG standards are better for businesses. Companies may identify cost savings, develop new products, win more contracts and customers, and ultimately find more potential buyers willing to pay more at exit. This mind-set was clear from the scale and breadth of the recent Responsible Investment Forum in Berlin. Co-hosted by the Principles for Responsible Investment, over 200 industry practitioners discussed topics ranging from climate change and cybersecurity to the role of supply chain management and the integration of ESG experts into deal teams.
Environmental consultancy ERM’s private equity survey last year found that 70% of the 60 general and limited partners questioned had seen ESG materially impact the value of their investments, either positively or negatively. Where value was created, respondents said that at 40% of their portfolio companies margins had improved, thanks to sustainable practices such as energy, water and waste reduction. A further 30% of companies benefited from an improved reputation, leading to commercial advantages, while 20% experienced value enhancement from using more sustainable new products and services. For around 10% of portfolio companies, ESG factors led to higher exit multiples.
European private equity has an opportunity – and a responsibility – to build on its position as a global leader in ESG. Thanks to input from general partners, investors and service providers, Invest Europe fully integrated ESG into its Professional Standards Handbook in 2015, creating a template for others to follow. The creation of our ESG due diligence questionnaire has enabled general partners, regardless of their resources, to consider comprehensive ESG factors when making investment decisions. It is in this spirit of striving to make a difference and keeping the industry moving forward, that Invest Europe’s Responsible Investment Roundtable is dedicated to continue creating resources to promote responsible investment.
Responsible investment is a growing global movement across the asset management universe – and private equity firms and their investors have a crucial role to play. Continued research into this area will reinforce the value of responsible investment and show that what is good for people and the planet can also be good for investors’ pockets.
Maaike van der Schoot, Chair of Responsible Investment Roundtable, Invest Europe; Responsible Investment Officer, AlpInvest Partners BV
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