Sustainability in Private Equity – From compliance to value creation
Sustainability has risen on the agenda of Private Equity firms, from compliance and risk management to the core of value creation. While investors have been working to integrate Environmental, Social and Governance (ESG) factors into investment processes for several years, value creation is now the top driver for sustainability in Private Equity.
In this article we discuss key priorities for Private Equity funds in the Nordics in delivering on the value creation potential of sustainability. In particular, we explore how sustainability can be defined, incorporated into investment processes, and measured.
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Three priorities for Private Equity firms to turn words into actions:
- Develop frameworks to establish and communicate the fund’s definition of sustainability, and how to measure and boost the sustainable contribution of current and potential investments during ownership. This will help funds navigate in an evolving regulatory landscape, enable more transparent communication with investors, as well as provide investment professionals with a clear path to enhancing sustainable contribution and value.
- Continue to incorporate sustainability across the investment cycle, focusing in particular on getting the most out of the ESG Due Diligence. Broadening the ESG DD scope and aligning it with key commercial and financial topics, has the potential to uncover and test key sustainability-related value creation hypotheses, and incorporate these in the Full Potential Plans early on.
- Use the current regulatory push to get a better understanding of impact, as well as to align sustainability commitments with ensuring profitable growth and clear exit value at the end of the investment period. In particular, the CSRD requirement to disclose greenhouse gas emission baseline and net zero pathway, should be leveraged to incorporate climate targets in corporate strategies, prioritizing cost-effective emission reduction levers.
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