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Private Equity Firms Are Uniquely Positioned to Drive Change on an Array of Sustainability Topics and Create Stronger Businesses in the Process
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BCG’s First Annual Sustainability in Private Equity Report Examines How Private Equity-Owned Firms Measure Up When It Comes to Decarbonization, Renewable Energy Use, and Social Impact
Sustainability remains a key point of discussion within the private equity industry. Even as some critics accuse the industry of greenwashing, others express concerns about whether PE firms are prioritizing sustainability objectives over financial returns.
In hopes of shedding light on the real status of sustainability in the industry, Boston Consulting Group (BCG) releases its first annual Sustainability in Private Equity report. The report offers a detailed picture of the PE industry’s current performance on social and sustainability metrics, PE firms’ role as indicators of business excellence, how performance is changing over time, and how it is connected to financial outcomes. 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.
Launched in 2021, the EDCI is a coalition of 350 PE general partners and limited partners, led by a steering committee chaired by The Carlyle Group and CPP Investments. The initiative’s mission is to drive convergence around meaningful metrics for the private markets and generate useful, comparable, performance-based data.
“Private equity is already recognized for its ability to transform financially underperforming companies,” said Vinay Shandal, BCG’s global head of sustainable investing and a coauthor of the report. “We believe that the industry is also uniquely positioned to drive change when it comes to both sustainability and social metrics—creating value for investors and stakeholders alike.”
The report examines how PE-backed firms stack up in three key areas: decarbonization, renewable energy use, and social impact.
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Among the key findings:
- Decarbonization. The PE industry has an important role to play in the fight against climate change and building stronger businesses in the process. Greenhouse gas emissions intensity varies significantly across the many types of industries in which portfolio companies operate. The report finds that PE firms have—to date—been more successful in driving decarbonization at their larger portfolio companies (ahead of their public peers) than at their smaller ones. Working with these larger businesses, PE firms are effectively extending their investment playbooks to include decarbonization, scanning their portfolios to find opportunities that create value, and establishing strong governance processes involving portfolio companies’ senior leadership.
- Renewable Energy Use. The PE model is effective at driving increases in renewables adoption—albeit from a low base. While portfolio companies early in a PE hold period had low levels of renewable energy uptake (significantly lower than their public peers), companies held for more than two years had an average of three times that level. Still, PE firms can do more to help their portfolio companies capitalize on the opportunities that increased renewable energy use can bring (particularly in the US, where renewables use substantially lags European uptake)—opportunities that include reducing energy costs, increasing energy reliability, and improving competitive strategic positioning.
- Social Impact. The report examines two important themes from the EDCI data: the quantity and quality of jobs being created at PE-owned companies, and diversity—both at the board level and across top management:
- Contrary to a common perception of PE, private companies continue to create significantly higher numbers of jobs, net of attrition, than their public peers. The report found that in the past year, private companies hired four more net new employees per 100 full-time employees than did public companies. In addition to boosting the absolute number of jobs, PE firms are also pushing to improve the quality of the jobs that they create, a critical social aspect. The report highlights the links between social outcomes and financial performance—for example, the ways in which greater employee engagement correlates with lower attrition (by saving costs and increasing productivity).
- The results of the first year of the EDCI showed that private markets significantly lagged the public markets in terms of board-level gender diversity. This year’s results reveal that a considerable gap still remains, with only relatively modest gains on this front. The number of private companies with at least one woman on their boards rose just 3 percentage points, to 57%, substantially lagging public peers (where a full 90% of companies had at least one woman on their boards).
- This year, however, the EDCI added a new metric—gender diversity in the C-suite—and here it is interesting to note that private companies are outperforming their public counterparts, with women making up 22% of the C-suite at the median private company, compared with just 17% at public companies. Moreover, the proportion of women in the C-suite at private companies increases over the lifetime of a PE fund’s investment.
“The findings of the report are encouraging. While there is still room for improvement, the potential for private equity to move the needle on important environmental and social issues—and in doing so drive outsize financial returns—is clear,” said Ben Morley, a partner and associate director at BCG and coauthor of the report. “We’re excited to see leading firms adapt their existing capabilities in innovative ways to lead the way toward a more sustainable and inclusive world.”
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