Sustainability is becoming more important for corporate governance and investments all the time. Yet sometimes the private equity industry still lacks clear strategies for introducing and implementing sustainability. But an ESG Performance Monitoring Framework can be used to manage improvement efforts both at the fund level and in portfolio companies.
More and more companies are treating environmentally conscious, socially aware conduct as a relevant management goal and integrating it in their corporate strategies. After all, allowing for environmental, social and governance (ESG) criteria is something both society and regulators are now coming to expect. And those criteria also offer measurable economic potential. It’s true that national legislators and the European Union have taken their first specific steps toward setting uniform requirements for sustainability and social responsibility for financial investors (such as the Taxonomy Regulation, the SFDR, the CSRD). But the associated contents and details have not been worked out far enough yet for us to be able to speak of a global (or at least EU-wide) reporting standard for investment managers. All the same, many private equity investment managers are looking very hard at the topic right now. With no complete legal framework available, a broad variety of voluntarily based approaches to an ESG commitment and reporting have evolved, especially in the past few years. The pressure on private equity firms comes directly from greater demand. Limited partners in particular are proving to be the driving force in boosting the significance of ESG for private equity, and that effect is going to continue to increase sharply. As the details of legal framework become more firmly established, existing ESG reporting is likely to harmonize rapidly in the near future, and the last fund managers who were wavering about ESG can soon be expected to start cooperating and make a commitment.