Since the establishment of the United Nations' World Commission on Environment and Development, sustainable development has been gaining momentum in the private equity (PE) industry. Sustainable development refers to development that meets the economic and social needs of the present without compromising the ability of future generations to meet their own economic and social goals. The issues and considerations underpinning this development comprise a broad array but generally refer to three central factors – environmental, social and governance (ESG) principles – which are applied to gauge the sustainability and ethical impact of an investment in a company or business. ESG principles have become integral to the investment strategy of asset managers and investors alike. In the PE industry, the desire to embrace sustainability has led to an increase in PE firms and funds coming to the market that are dedicated to addressing the environmental or social aspects of sustainable development in their investment processes.
It is an interesting time in the development of sustainable business practices globally as governments, investors and business leaders find new ways to address some of the world's most pressing issues. As a region, Asia has its own special challenges given its varied economies and diverse ESG issues demanding a wide range of ESG-related responses. Governments throughout the region are beginning to emulate the regulatory regimes of their foreign counterparts in Europe and North America, which are more advanced in the promotion of ESG reporting and policing of offenders. Similarly, foreign investors are exerting their influence and promoting sustainable business practices, including ESG integration, throughout the region.
The global trend toward ESG integration presents both challenges and opportunities. While PE sponsors may have some difficulty integrating new ESG factors into existing investment processes, the ability to show investors (with an increasing focus on sustainability) a serious and dedicated approach to ESG issues may well attract new business. Thankfully, as the ESG movement grows, it is becoming more apparent that, with a little creativity, there are as many ways for PE sponsors to address investors' expectations regarding ESG issues as there are issues themselves.
Originally published September 18 2019
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