As business leaders, economists, politicians, and others converge in Davos this week for the World Economic Forum, no doubt many discussions will focus on how investors can influence the energy transition. Private equity has a critical role to play in the move to net zero—indeed, the industry is uniquely positioned to advance the entire spectrum of environmental, social and governance (ESG) issues.
Investors’ potential impact is so profound, in fact, that they should take care not to let current events derail it. That’s not to downplay the challenges posed by Russia’s invasion of Ukraine, soaring inflation, Wall Street’s recent rollercoaster, or any number of other disruptions. But now that investors have realized that ESG can improve the planet and create more value they should remain focused despite disruption and uncertainty.
Leading firms are doing just that. In fact, an overwhelming majority of limited partners (LPs) say they would walk away from a deal if it posed ESG concerns. LPs are now asking for more ESG-related KPIs, including diversity, equity and inclusion (DEI), and 80% say they plan to increase the scope of such requests over the next three years. Nearly 70% also say they plan to increase ESG investment allocations and in-house ESG-related capabilities over that same period.
Until recently, those efforts have been hampered by a lack of adequate reporting tools and systems, an issue that also explains the notable gap between public and private companies’ ability to accurately report on greenhouse gas emissions and climate risks. For example, there is a 40-point gap in Scope 1-3 emissions reporting between public and private companies, and nearly as large a difference in the setting of emissions targets. Private companies can learn a lot from how larger public companies are addressing climate issues, and they have plenty of incentive to do so, given the increasing pressure being brought to bear by regulators, consumers, and investors.
We have additional resources that can help you do the same, including:
- A podcast featuring Bain Advisory Partner Axel Seemann, who describes how leading private equity firms are closing the gap between ESG awareness and action. In the sequel he addresses the emergence and maturation of ESG ratings, standards, and benchmarks, which are helping firms manage their ESG strategies more effectively than ever.
- In-depth research on a critical facet of DEI: how women think and feel about inclusion in the workplace, and why addressing the “texture of inclusion” can create a virtuous cycle that not only benefits the organization and its female employees but fosters greater gender equity across society. This is a very promising area for private equity to stake a leadership position.
We think you’ll find these insights useful as you continue to embed ESG and DEI concerns into your investment strategies.
