As global leaders address the sustainability agenda, environmental, social and governance (ESG) topics in the investment process are becoming more important. Yet many investors worry that responsible investment might mean lower returns. According to a survey from Schroders, 44% of 500 global institutional investors – and 47% in Europe – are concerned that investing sustainably will hurt performance. This runs counter to a growing body of evidence.
Approximately $23 trillion (€19.6 trillion) of global assets are managed under responsible investment strategies, up 25% on 2014, according to the Global Sustainable Investment Council. Such strategies represent 26% of professionally managed assets and Europe leads the way with over $12 trillion of assets.
Many private equity managers and investors know anecdotally or from experience that sustainability has a positive impact on financial performance. Environmental consultancy ERM’s private equity survey found that 70% of the 60 general and limited partners questioned had seen ESG materially impact the value of their investments, either positively or negatively.
Where value was created, respondents said margins had improved at 40% of their portfolio companies, thanks to sustainable practices such as energy, water and waste reduction. A further 30% benefited from an improved reputation. And for around 10%, addressing ESG factors led to higher exit multiples.
In addition to growing economic evidence, there is a push for greater regulation. The European Commission recently published its Action Plan on Financing Sustainable Growth, which requires institutional investors and asset managers to integrate ESG factors into decision-making and be more transparent about their sustainability practices. Sustainable finance is no longer just an option, it is becoming the new reality. And private equity’s model of active management and long-term horizons make it well positioned to support this.
Invest Europe fully integrated ESG into its ‘Professional Standards Handbook’ in 2015. Our ESG due diligence questionnaire, published a year later, helps fund managers to take a comprehensive view of responsible investment factors when making investment decisions. It is in this spirit of striving to make a difference that Invest Europe’s Responsible Investment Roundtable continues to create and update such resources to promote responsible investment within private equity.
Invest Europe commissioned Ipsos MORI to survey investors from the UK, Germany, France, China and the US. When asked to compare Europe, the US and China as investment destinations, 74% listed Europe as the strongest performer on its commitment to sustainability and the environment. Almost three-quarters asserted that sustainability is an important issue in their investment decision-making. By embracing ESG considerations, private equity can deliver the sustainable investment opportunities global investors are seeking. This demonstrates beyond doubt that responsible investment is not only good for the planet, it is good for investors’ pockets.
Maaike van der Schoot is a responsible investment officer at AlpInvest Partners BV and chair of Invest Europe’s Responsible Investment Roundtable
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