Private Equity sees ESG as a strategic value driver; Belgian PE firms moving towards greater ESG maturity

Private Equity sees ESG as a strategic value driver; Belgian PE firms moving towards greater ESG maturity

Private Equity Responsible Investment Survey 2021

  • ESG is moving up the board agenda, with 56% of private equity firms globally saying it is discussed more than once a year, compared with 35% saying the same in 2019. In Belgium only 22% of respondents discuss ESG at board level more than once a year
  • Worldwide 72% of private equity firms systematically screen target companies for ESG risks and opportunities at the pre-acquisition stage; this practice is taken up by just 35% of Belgian firms
  • More than half (56%) of respondents at global level have turned down a potential investment or refused to enter into an agreement on ESG grounds; in Belgium this figure is 39%
  • Increasing recognition of the value creation opportunities arising from the transition to sustainable business among Belgian PE firms is set to reinforce ESG / responsible investment approach

Tuesday 22 June 2021 - The management of environmental, social and governance (ESG) issues is moving up the board agenda for private equity (PE) firms, although climate risk exposure requires greater scrutiny. Belgian PE firms have good intentions but are lagging behind in adopting ESG measures. PwC’s Private Equity Responsible Investment Survey 2021 draws upon the views of 209 respondents from 35 countries and territories, including 28 Belgian respondents.

The 2021 survey finds that since 2019, the proportion of respondents stating that ESG features in board meetings more than once a year has risen from 35% to 56%. Although in Belgium less than a quarter of respondents say the same (22%), ESG is on the rise as a priority for PE firms. 26% of the Belgian PE firms surveyed have committed to the Principles for Responsible Investment supported by the United Nations, with an additional 30% considering doing so within the next year (compared to 68% and 17% respectively at global level). This highlights that Belgian PE firms have come to realise that ESG offers a real business opportunity, and they clearly intend to quickly catch up through the integration of ESG considerations throughout the deal cycle.

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In areas where ESG issues have long been on the agenda or are regulated (e.g. occupational health and safety, preventing bribery and corruption) the gap between the level of concern and action is small. However, on issues that are fast becoming business-defining in the post-pandemic global economy, such as net zero, climate risk, biodiversity and the ethics of emerging technologies, the gap between concern and action should be a topic of discussion for investment managers and Board of PE firms.

ESG factors are now routinely evaluated by private equity firms when making investment decisions. At global level, three quarters (72%) of respondents always screen target companies for ESG risks and opportunities at the pre-acquisition stage, and more than half (56%) have turned down a potential investment or refused to enter into an agreement on ESG grounds. In Belgium these figures are 35% and 39% respectively.

There are several possible factors contributing to Belgian PE firms lagging behind their peers, linked mainly to maturity of approach. For instance, Belgian PE firms tend to focus on ESG issues with a high level of materiality, whereas abroad ESG issues with both a high as well as medium level of materiality are taken into consideration for decision making. The sophistication of formal quantitative methodology may also play a role, in particular the ability to value ESG performance at exit. Currently 26% of Belgian PE firms include ESG issues in the programme for exit, compared to 50% of respondents at global level. Another interesting difference is that Belgian PE firms tend to prefer to give ESG responsibility to a committee rather than assigning responsibility to a specific partner or dedicated ESG manager. This indicates that in Belgium, which counts not only PE partnerships, but also many family offices, there is a tendency to prefer shared responsibility in such a new domain which is clearly gaining in importance.

We’re seeing that in the boardroom, the focus on ESG is shifting from compliance to value creation. Belgian PE firms are clearly starting to acknowledge that major ESG risks at a target company can be a reason to walk away from the acquisition, or can lead to a significant mark-down of the valuation,” states Philippe Estas, Partner and Private Equity Lead at PwC Belgium. “As techniques for reviewing ESG information and assessing materiality are refined, we do expect pre-investment screening to rise, along with a willingness to walk away from a deal on ESG grounds. Similarly, as methodologies become more sophisticated, ESG issues are increasingly taken up in action plans during the holding period. This helps to protect and create value and demonstrates the importance of embedding ESG into the company and its strategy, such that it becomes purpose driven and enhances value at exit.”

The broad range and complexity of ESG aspects that PE firms need to assess is also a challenge. Yet, just over half of Belgian PE firms train their investment teams on ESG / responsible investment issues (on an ad hoc basis), and only 21% of Belgian respondents have a dedicated ESG / responsible investment professional team. This could represent an obstacle in evaluating and using the ESG data collected and measured by investment teams.

Today stakeholders expect companies to understand the impact they have on society, and to make a contribution to it, on the basis of a clear roadmap and action plan,” explains Reinout De Clercq, Director and sustainability expert at PwC Belgium. “Recruiting the right talent is crucial in this regard. To assess the full potential of an investment, successfully monitor ESG performance in the holding phase, and fully realise that potential will require additional ESG training of investment committee members and the investment team. There’s also work to be done to share best practices between portfolio companies, so that there is synergy in the way ESG capabilities are built up and shared within the ecosystem - not only vertically from the PE firm, but also horizontally from other industry players who have faced similar challenges. This means hiring for specific ESG expertise and unlocking the power of more diverse teams - in terms of gender, ethnicity and age, but also socioeconomic background and training - to truly deliver value to all stakeholders.”

 

About PwC’s Private Equity Responsible Investment Survey

The Global Private Equity Responsible Investment Survey explores the views of general partners and limited partners in responsible investment among global private equity firms. This year, 209 firms from 35 territories responded. 28 respondents were Belgian or have a Belgian footprint. Globally, 198 respondents were general partners and 41 were limited partners (22 and 14 respectively for the 28 belgian respondents). Globally, 30 respondents were both general and limited partners. The vast majority (81%) came from Europe. We believe this might be because European firms have spent the past few years adapting their strategies and investment activities to EU regulations that require robust ESG disclosure across the breadth of the financial services landscape. This level of adoption and adaptation is reflected in the survey findings.

PwC carried out the survey in 2020 through an online questionnaire. To track the simultaneous maturity of responsible investment in both stakeholder groups, we surveyed limited partners and general partners together. The survey asked many of the same questions as in previous surveys to allow for comparison over time. It also included questions on new thematic areas, like sustainable value creation. PwC’s Private Equity Responsible Investment Survey 2021 is the fifth edition of the survey, following previous editions in 2019, 2016, 2015 and 2013. Previous editions can be found here: www.pwc.com/responsibleinvestment  

 

Read PwC's Private Equity Responsible Investment Survey for more insights.

 

Contact

Erik Oosthuizen

erik.oosthuizen@pwc.com
0474 56 42 76

www.pwc.com

 

 

 

 

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