Private equity firms are ‘well placed’ to drive sustainability measures at their portfolio companies, a new report by Boston Consulting Group (BCG) has found.
BCG‘s second annual Sustainability in Private Equity report notes that private equity firms are ‘increasingly aware’ of the link between maintaining a sustainable business and commercial success.
‘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,’ BCG noted.
The global private equity sector boasts more than $8.7 trillion in assets under management, indicating the potential influence the sector has in moving the needle on sustainability.
‘Sustainability that creates value’
“The private equity industry has demonstrated how to advance sustainability in a way that creates value, and the sector is just getting started,” commented Vinay Shandal, BCG’s global head of sustainable investing and a co-author of the report. “Private equity, with its long-term investment horizons, sophisticated owners and influence, creates the ideal context to drive these initiatives.”
According to BCG, some 85% of limited partners expect to prioritise sustainability more heavily over the next three years, while advancements in renewable energy adoption and gender diversity are also being observed.
Decarbonisation
However, challenges remain, particularly when it comes to decarbonisation. Currently, just over a fifth (22%) of private equity-owned companies have implemented a decarbonisation strategy, lagging behind the 29% of public companies that have done so.
Despite this gap, private equity-owned firms that have adopted such strategies are reportedly reducing emissions more rapidly than their public counterparts, BCG added.
Renewable energy
Among privately-owned companies that are utilising renewable energy, meanwhile, the median usage increased to 30% in 2023, up from 28% the previous year.
In contrast, public companies saw a rise from 29% to 32% during the same timeframe.
BCG’s report also notes that the percentage of private companies significantly increasing their renewable energy usage (by 25 percentage points or more) rose to 12%, compared to just 6% among public companies.
On a region-by-region basis, North American private companies still trail behind European firms in renewable energy adoption, with European companies sourcing an average of 22% of their energy from renewables, compared to only 1% in North America.
Strategic planning
Looking ahead, BCG underscores the critical need for continued momentum in integrating sustainability into strategic planning within the private equity sector.
“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,” commented Ben Morley, a partner and associate director at BCG and co-author 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.” Read more here.
