Shareholders are concerned more than ever about the environmental and social impact of a private equity firm’s actions and investments. Nearly 80% of global investors say their focus on sustainability is greater than it was just five years ago. And the pressure is rising for PE firms to incorporate environmental, social, and governance issues in their investment decisions.
But Private Equity’s move towards ‘Impact Investing’ has been growing steadily since the term was popularized in 2007, driven not only by interest in sustainability among investors, but also as a way for a firms to tout innovative and unique investment strategies.
As a result, many firms have considered environmental, social and governance (ESG) impact in their investing decisions, addressing such topics as climate change, social inequality, and ethical supply chain sourcing. Once they align with the ESG issues shareholders care most about, then they can focus attention on generating positive returns on investments.
Firms can best take advantage of socially responsible investing by understanding the forces driving shareholder behavior:
Shareholder Activism is Gaining Strength
Investors have been vocal about sustainable investing for years, but now they are organizing their collective power to influence a company’s decision making. This type of shareholder activism incorporates engagement tactics such as filing shareholder proposals, gathering at annual meetings, and demanding discussions with company executives and the board.
As they pressure companies to increase environmental and social scrutiny, they’re demanding specific action on agendas such as carbon footprint reduction, diversity in the workforce, and employing a more sustainable supply chain.
These activist campaigns aren’t always motivated by philanthropy, though. The thinking is that changing corporate behavior in sustainability, ethical, and environmental issues will lessen operational risk – and ultimately reap strong financial returns.
A Shift in Investor Demographics
Changing shareholder demographics is another driving force behind sustainable investing. As wealth transfers to the next generation comprised of Millennials, there are great expectations on their investments to also fuel social change.
Additionally, the rise of women joining the finance field has amplified the focus on ethical investing. Women are traditionally considered to be nurturers, with an interest in improving society. This focus on the greater good has been translating into their investing power, which is only growing stronger.
According to a Boston College Center on Wealth and Philanthropy study from 2009, women currently own more than half of the investable assets in the United States, and are positioned to inherit 70% of the money being passed down over the next two generations.
Women and Millennials’ awareness of sustainable issues may have been viewed as soft only a few years back, but the finance industry’s attitude has finally turned as these issues take center stage in public conversation.
Private Equity Firms Take Action
All signs show that sustainable approaches to investing are here to stay. A 2019 PwC survey has found that responsible investment and sustainable development are a priority for private equity companies. Nine out of ten respondents have already adopted or are currently developing a responsible investment policy, as (ESG) considerations shape investment decision making and portfolio management.
Sustainability concerns are also growing at the Board level. The survey reports that 81 percent of private equity firms discuss environmental, social and governance (ESG) matters with the Board at least once a year, with more than one-third doing so more often.
Meanwhile, 35% of Private Equity house respondents confirm they have a dedicated team for responsible investing, up from 27% in 2016.
It’s clear that private equity houses have embraced the clear business case for responsible investing. They are starting to take sustainability seriously, and have affected genuine change. Only time will tell if this investing for impact will generate high returns in the long run.