Study: ESG reporting focuses on risk not reward

Research shows more GPs are reporting and monitoring portfolio company ESG risks, but few are calculating the value they create through these initiatives.

Private equity firms are not assigning a value to their environmental, social and governance (ESG) work, according to PwC research.

In a survey PwC asked 103 private equity firms across 18 countries about their ESG initiatives. The professional services firm discovered more than 80 percent of respondents monitor ESG activites at the portfolio company level, but less than 15 percent of GPs go one step further to calculate the value their ESG activity produces. 

“These results show that private equity houses understand the value of ESG management. But not only could private equity houses generate more value through better ESG management, it is also possible for this value to be quantified and communicated to investors, acquirers and wider stakeholders,” said in a statement Phil Case, a PwC director who focuses on sustainability and climate change. 

A strong majority (80 percent) of fund managers believe LPs' interest in ESG issues will increase in the next two years, the research showed. Case said this represents an opportunity for GPs to showcase their responsible investment programs and policies to bolster investor relations. 

But calculating the value-add of ESG policies is not easy, he said. “It needs specialized skills, dedicated resources and new ways of thinking about how companies are managed and where economies and growth are headed.”

Some GPs are ahead of the curve on tracking ESG-driven value. Earlier this year Adveq unveiled a web-based tool dubbed ESG Analyticsto to track ESG progress at their portfolio companies. The firm ran a pilot exercise last year and is now rolling out the strategy in its European portfolio, said Tim Creed, managing director and head of Adveq’s European investment program. 

“Opportunity checklists” are also being developed by GPs who want to methodically test portfolio companies’ on ESG value creation potential, measuring their energy consumption for example.