Applying ESG criteria to long-term Private Equity investments can enhance returns and mitigate risks, especially in Frontier and Emerging markets

APR 2015

An ESG focus in private equity could dampen profitability in the short term, but the long term performance will pay off according to Sarona’s Vivina Berla.The senior partner told AltAssets, “The challenge is that most people feel there is a trade-off between high quality ESG and financial returns.“In the short term, companies may need to invest time and capital to achieve higher ESG standards which would impact profitability.

“But in the long term, I have no doubt that ESG will pay off not just by delivering better financial returns but also by lowering overall risk and improving the experience of all stakeholders: suppliers, employees, clients and the community in which companies operate.”

A recent study by the London Business School’s Coller Institute of Private Equity revealed institutional investors are increasingly demanding that private equity firms adopt ESG policies in their investment processes.

“In the case of private equity, a focus on ESG can actually ultimately increase returns on investment because it is possible to command a premium when selling or exiting a ‘clean company’ rather than one riddled by social and governance issues.”

Along with helping drive returns, Berla says that ESG is even more important when investing in frontier and emerging markets.

“ESG can also mitigate risks, especially in frontier and emerging markets where there is so little transparency, the markets are less mature, and companies are usually at an earlier stage of development and strength.”

While policies such as SRI and ESG are increasingly found at the heart of a private equity firm’s strategy, some still see them as little more than meaningless jargon.

“In the private equity sector, the adoption of ESG principles has been mixed. The number of ESG panels at conferences and the number of ESG articles in the press has skyrocketed, most people would say that they have always done it but it is only recently that GPs have started talking about the value of actually implementing.

“ In their explicit and public commitment to ESG principles, the large Dutch pension funds seem to be ahead of many other countries, along with the Scandinavians.

“I think it’s a cultural thing, generally as a society the Dutch and the Nordics seem to be more progressive and socially minded than others.”

Earlier this week, Sarona was recognised for creating the most positive overall social and environmental impact, with B-lab identifying the firm as a ‘Best for the World’.

“For us it is a wonderful recognition for all the work and efforts we have dedicated to creating a company focused on serving multiple stakeholders as opposed to just shareholders.”

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