From Corporate Social Responsibility to PE Impact Funds: Investor Interest in ESG and Sustainability Gains Pace
Sep 2021
Institutional investors are increasingly accountable for how they deploy capital. More so than the widespread divestment from fossil fuels over the last decade, some capital allocators today are seeking to advance their goals through environmental and social impact investments.
The pressure from shareholders and stakeholders has continued to grow over the past year, and we are now seeing this growing scrutiny of governance and investment strategy become more accepted, or indeed encouraged within the middle market. Today, over half of private equity firms say environmental, social and governance (ESG)-related issues are discussed in regular board meetings, up from about a third just two years ago.
What began as a movement led by insurance carriers negatively impacted by the risks of climate change and constituent pressure on public pension fund asset allocation, has begun to influence the thought process of private equity and private debt firms’ limited partners (LPs)—and, in turn, private capital managers themselves.
Summary
-
Lincoln International discusses several key considerations for private companies, lenders and sponsors working to keep up with the rapidly evolving ESG landscape.
- Click here to download a printable version of this perspective.
- Sign up to receive Lincoln's perspectives
Two recent examples illustrate this trend amongst large, publicly listed asset allocators. In BlackRock CEO Larry Fink’s annual letter to CEOs this year, he pinpointed climate transition as the next historic investment opportunity. Late last year, the NASDAQ stock exchange filed a proposal with the SEC to require companies listed on the exchange to publicly disclose statistics on the diversity of their boards.
In addition to capital allocation, sponsors and lenders are increasingly incorporating sustainability considerations into their due diligence and reporting processes to gain a better understanding of the companies in which they are deploying their capital. As demand for responsible investing accelerates, which stakeholders often expect capital allocators to mirror, more fund managers are making ESG reporting a core part of their internal investment evaluations and shifting their strategy to better align with investor priorities.
Though enthusiasm for ESG investing has been embraced more slowly in the U.S. than in Europe, the rising interest from investors has been observed globally. We expect the continued adoption of ESG considerations in investment decisions as market participants around the world define their own sustainable investing strategies, and stakeholders—from everyday consumers to private equity LPs—increase pressure to allocate capital responsibly.
Standardization of ESG Reporting is on the Horizon, But Not Yet Cemented
For lenders and sponsors evaluating investment opportunities, one essential key in this reporting process lies in measurability. When it comes to financing or launching a sales process, demonstrating ESG performance to lenders or investors can be integral to a deal. We have seen many reporting requirements on sustainability initiatives remain based on company self-disclosures, with limited uptake of the newly forming standardized frameworks. The risk remains present for companies to cherry-pick favorable metrics to demonstrate performance.
Sustainability reporting standards are rapidly evolving as LPs look for more transparency into private funds’ performance on highly varied and divergent ESG factors. While a universal standard for reporting has yet to be established, regulators and market participants are in the early stages of discovering bespoke reporting and internally developed methods that work for them.
ESG is a process—not an endpoint. Lincoln expects some capital allocators to look for an established framework for future progress around ESG impact. Going forward, we expect continuity of sustainability commitment will be noticed by investors, developing a strategy to achieve sustainability goals should be discussed for companies looking to tap into capital markets.
Lincoln Perspective
Looking ahead, sustainability-linked investor interest is only expected to grow. As private companies, lenders and sponsors grapple with the rapidly evolving ESG landscape, Lincoln has identified several key considerations:
|
Contributors
I build trust with clients by putting their interests first at all times.
Aude Doyen
Managing Director
LondonMeet Professionals with Complementary Expertise in Capital Advisory and Valuations & Opinions
I build trust with clients by putting their interests first at all times.
Aude Doyen
Managing Director
LondonRelated Perspectives
Transportation & Logistics Services
Overview The global transportation and logistics sector is in a period of transition and ongoing adjustment. While the extremes of pandemic-induced disruptions have eased, the sector still faces lingering challenges… Read More
FreightWaves | Logistics M&A Market Looks Brighter in 2024
Originally posted on FreightWaves on March 6, 2024. Gaurang Shastri, Managing Director in our Business Services Group, recently discussed the 2024 mergers and acquisitions market in FreightWaves’ 3PL Summit. Watch… Read More
Distribution Quarterly Review Q4 2023
Global mergers and acquisition (M&A) activity picked up slightly in the fourth quarter, with a rebound in deal volume in Europe leading the way.
Information Technology Services Year-End 2023 Report
Lincoln International is pleased to present the latest issue of its Information Technology Services Year-End Report.