Private Equity Pushes Forward on Sustainability Goals, Driven by Investor Demand and Commercial Benefits

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Oct 23, 2024, 00:01 ET

Private equity firms are well placed to drive impact at their portfolio companies on many dimensions of sustainability
Both general partners (GPs) and limited partners (LPs) place increasing emphasis on sustainability progress; 85% of the LPs surveyed said they expect to increase their prioritization of sustainability-related issues over the next three years
BCG's Second Annual Sustainability in Private Equity Report tracks the industry's progress and path forward

BOSTON, Oct. 23, 2024 /PRNewswire/ -- As the private equity (PE) industry expands its global footprint, with over $8.7 trillion in assets under management, the sector's influence on sustainability is growing. At the same time, GPs at firms are increasingly aware of the linkage between improving sustainability metrics and commercial benefits.

Progress to date has been notable, especially in the areas of renewable energy adoption and gender diversity in the C-suite of portfolio companies. This stems in part from investor expectations, as limited partners (LPs) place growing weight on these outcomes and expect PE firms to integrate sustainability principles into their investment strategies.

These are among the findings of Boston Consulting Group's (BCG) second annual Sustainability in Private Equity report. The report draws on data from the ESG Data Convergence Initiative (EDCI), case studies from industry participants, as well as BCG's deep Climate & Sustainability and Social Impact expertise. The data covers around 6,200 private companies held by more than 260 PE firms around the world.

"The private equity industry has demonstrated how to advance sustainability in a way that creates value, and the sector is just getting started," said Vinay Shandal, BCG's global head of sustainable investing and a coauthor of the report. "Private equity, with its long-term investment horizons, sophisticated owners and influence, creates the ideal context to drive these initiatives."

Advancing Toward Net Zero, But Gaps Remain

While PE firms are making significant strides in driving sustainability across their portfolios, the journey to net zero remains a challenging endeavor. Our research found that only 22% of PE-owned companies have a decarbonization strategy in place. This figure highlights a significant gap compared to public companies, where 29% have such strategies.

However, while private companies are less likely to have a decarbonization strategy in place than public companies, those private companies that do are reducing emissions at a significantly faster rate, underscoring the power of the private equity investment model in driving impact.

Among private companies that use renewables, the median EDCI company increased its usage to 30% in 2023, up from 28% last year. In comparison, public companies saw a rise from 29% to 32% over the same period. Even more promising is the narrowing gap between private and public companies in adoption of renewables. The percentage of private companies that boosted their renewable energy usage by 25 percentage points or more rose by 2 percentage points from last year to 12%, compared to just 6% of public companies during the same period.

At the regional level, private companies in North America still lag significantly behind their European counterparts, with the median European company (including those that use no renewables at all) sourcing 22% of its energy from renewables compared to just 1% in North America, up from 0% last year.

Investor Expectations Drive a Greater Focus on Sustainability

The growing emphasis on sustainability is not only a response to global environmental challenges but also a reflection of shifting investor expectations. A recent survey of 230 members of the EDCI reveals that 70% of LPs believe companies that effectively manage sustainability issues will command a valuation premium. Moreover, 40% of LPs have dedicated funds toward climate investing, though their approaches vary significantly—ranging from investments in low-emitting sectors to supporting the grey-to-green transformations necessary for global decarbonization.

The message from LPs is clear: sustainability matters. In our survey, 85% of the LPs said they expect to increase their prioritization of sustainability-related issues over the next three years.

Progress Continues on Gender Diversity, Job Creation

Private equity continues to show progress in gender diversity and job creation. According to the report, 77% of PE-backed companies now have at least one woman in the C-suite, significantly outperforming their public counterparts, at 64%. However, private companies still lag in board-level diversity, with only 61% having women on their boards, compared to 89% in public companies.

In terms of job creation by PE-owned companies, although the pace has slowed due to broader economic pressures, private companies are still creating jobs at a higher rate than public firms. Private companies generated four net new hires per 100 full-time employees, compared to just one in public firms.

Looking Ahead: The Need for Continued Momentum

The PE industry stands at a critical juncture in its sustainability journey. There is increasing consensus on the role that integrating sustainability into strategic planning has to play in creating value and enabling impact for many portfolio companies.

"As sustainability initiatives within the industry continue to mature, better data collection and transparency will enable valuable insights for allocators, managers and portfolio companies alike," said Ben Morley, a partner and associate director at BCG and coauthor of the report. "We see clearly in the data that the private equity industry has an important role to play in driving positive change and transforming sustainability into a competitive advantage for private equity and the companies in which the sector invests."

Download each of the three articles that make up the report here:
Article 1: Where Are Private Equity Firms on Their Way to Net Zero?
Article 2: How Private Equity Firms Can Meet Investor Expectations
Article 3: A Year of Sustainability Progress in the Private Markets

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SOURCE Boston Consulting Group (BCG)