Integrating ESG strategy into PEI portfolios

By Jason Menghi & Kristen Sullivan, Deloitte

Incorporating ESG strategy across investment portfolios may open access to capital

With the current shift in capital markets and a shrinking public company market, private equity has become a mainstream investment option among large institutional investors. Accordingly, private equity investors (PEIs) need to be considerate of stakeholders’ needs and transparent about how their investments, structure, and operations drive value.

As PEIs strive to expand and promote private equity as a key funding option, they need a clear ESG policy and credible message about how ESG serves as a value driver and can position the organization to navigate environmental and societal market trends.

This can improve brand image, increase the ability to attract and retain talent that can help them grow, open opportunities to mitigate risk, and improve investment returns. ESG is not just an important factor in raising funds; it is becoming integral to managing the day-to-day operations of investment portfolio companies.

Mature versus emerging sustainable private equity firms

Mature PEIs
Many more mature PEIs have long had strategies in place. They have integrated ESG across an entire portfolio and have taken the opportunity to launch new strategies, such as impact funds.

A private equity impact investment strategy is designed to generate positive, measurable social and economic outcomes in addition to financial return. This can improve PEIs’ ability to raise more capital and potentially attract an entirely new base of investors.

Emerging PEIs
Emerging PEIs, on the other hand, may still be trying to understand what ESG is and how to effectively incorporate it into their strategy. Many still take a reactionary approach to ESG strategy, starting with a checklist approach or creating ad hoc strategies for one-off investments.

These sustainable private equity firms can leverage leading industry practices, such as establishing an enterprise-wide ESG framework that is consistently applied across the portfolio and throughout the investment life cycle. This can enable systematic evaluation of ESG performance information to identify risk exposure, improve efficiency, and drive additional value for the fund.