- Over three-quarters (78%) of global private equity firms said that their investment processes are unaffected by rising requirements around ESG disclosures.
- 84% of UK firms stated that they are investing unencumbered by rising ESG requirements compared to 74% in the US and 76% in Asia.
- Of the 22% of global private equity firms affected by ESG disclosure requirements, a broad range of impacts were reported including improved diversification, more effective portfolio management, limited investment opportunities and lower returns.
- Findings from research amongst private equity firms, commissioned by Gallagher’s specialist M&A insurance broking team to get further insight on industry issues.
Against a backdrop of growing scrutiny over private equity firms’ “licence to operate” and calls for greater engagement with environmental, social and governance (ESG) disclosures, 78% of global private equity firms (across both growth equity and buyout strategies) said that their investment process is unaffected by rising requirements around ESG disclosure, rising to 89% among the smallest firms (£1bn - £10bn AUM).
In a poll of more than 250 global private equity firms, only 22% of respondents reported an impact on investment processes and strategies due to increasing ESG disclosure requirements, according to research by Gallagher, one of the world's largest insurance broking, risk management and consulting services companies.
In the UK, the 16% of firms reporting an impact of increasing ESG requirements, cited a range of knock-on effects. One firm said sustainability was an area it was “focusing more and more on when thinking about future investments”, while another said that analysis around ESG criteria was helping to “determine the future financial performance” and providing a “positive impact on investments”. Not all firms took a positive view, however, with one firm stating that ESG disclosures were “limiting the opportunities to invest.”
In the US, over a quarter (26%) of firms reported knock-on impacts from rising ESG regulation and scrutiny. Firms said they must be "more careful" when investing and that the limitations by such disclosures have impacted returns, while others said the adoption of an ESG approach had supported effective portfolio management and improved diversification. ESG disclosures have driven one firm to undertake extended examination of organisations’ business and working models, their carbon impressions and their approach to climate change. Almost a quarter (24%) of firms based in Asia reported an ESG impact on the investment process. One firm said that the adoption of an ESG approach had encouraged the firm to consider the various parameters impacting consumer decisions to a greater extent across investment policies. Others said that increased disclosures had caused changes to both fund criteria and holding periods and led to the adoption of a more balanced approach in investment processes, taking additional time and effort to assess the suitability of an investment.
Charles Russell, Head of Transactional Risk at Gallagher, said: “Impact and sustainability has shot up the ranks of investor priorities in recent years, and a growing number of global private equity firms are factoring environmental, social and governance issues into their investment decisions, risk exposures and portfolio management.
"The fact that less than a quarter of private equity firms surveyed noted any impact of increasing ESG disclosure requirements indicates that they are either ahead of the curve in terms of adherence, or behind it.
"The link between companies with good ESG practices and long-term, sustainable value creation is widely recognised and, as an argument, is a well-trodden path. While we've seen increased due diligence on transactions across a broader set of risks, the current Covid-19 pandemic has brought broader sustainability issues into particularly sharp relief, increasing scrutiny of corporate debt burdens, how companies treat their employees and what companies are delivering to society. While firms’ experience and approach to ESG varies significantly across the industry, the direction of travel, towards positive societal change and more rigorous scrutiny of ESG exposures and the sustainability of investments, is clear."
Gallagher commissioned a survey of 258 global private equity firms in March 2020 by Censuswide. Of the firms surveyed, 100 firms were based in the US, 104 in the UK and 54 in Asia. The size of firms surveyed ranged from £100m AUM to over £500bn AUM.