Responsible Investment in Private Equity

In this paper, we aim, as a follow-up of the broader paper we recently published on this topic1, to analyze how Private Equity (PE) investors approach responsible investing cross-linking again conclusions from academic research with our experience as a PE investor as well as a survey of PE investors, including both Global Partners2 (GPs) and Limited Partners3 (LPs). We first show that through its long investment horizon – despite potential conflicts with short-term performance pressure -, its tighter control of portfolio companies and its natural focus on governance, the PE industry is well positioned to embrace responsible investing (RI).

We then find that PE investors are encouraged to take the sustainability route by pressure from final investors and often by their belief that RI is favorable to the risk/return features of their portfolio, particularly as RI practices are seen by many as a risk management tool. Regulatory pressure has up to now been less of a driver than on public investment activities, but this has started to change in Europe, mainly under the impact of SFDR and CSRD regulations.

As a result, we observe that although PE is often considered as lagging in the sustainability journey, the industry is catching up quickly and ESG has become a core due diligence criterion in PE. A 2022 survey reports that 70% of PE firms have integrated ESG considerations in their investment policy, but there are significant regional differences: the US and Europe stand at different levels in terms of adoption of responsible investing policies, making life complex for PE firms that are active in both continents.

Fourth, in terms of investment implementation, the engagement component, for instance in defining a net zero objective, is a natural one for PE investors whose role is precisely to accompany portfolio companies in setting strategy. Likewise, PE is often active in thematic investing due to its focus on innovative and high-growth sectors and more specifically on new business opportunities in the environment and health care, although traditional industries that need to transition should not be neglected.

Finally, challenges remain in terms of data quality and homogenization of reporting standards, although recent investor initiatives aim at closing the gap. Our observations also confirm that in order to be successful, responsible investing needs to be embedded in a PE firm’s overall organization and driven at the highest level of the institution.