How Can Private Equity Funds Achieve Their ESG Goals?

 Private equity funds consider sustainability and ESG metrics necessary in corporate financing. Therefore, financial professionals offering private equity support to companies and investors study different ESG frameworks, compliance requirements, and performance disclosure laws. This post will explain how private equity funds can achieve ESG goals. 

What is ESG? 

ESG measures an organization’s performance on sustainable development metrics divided into the environmental, social, and governance pillars or sections. Investors use ESG data services to check whether an organization complies with the metrics critical to realizing eco-friendly and socially responsible business objectives. 

Likewise, privately-held companies have used ESG consulting to devise compliance improvement plans to attract socially conscious investors. After all, investors believe that corporations must contribute to the community. They want businesses to reduce their adverse impact on the Earth’s magnificent environment. 

What is Private Equity? 

Private equity (PE) is a financial instrument concerning unlisted businesses that raises funds by exchanging some stake in company ownership. So, the companies and investors who want to benefit from this model use private equity solutions to find the best offers. 

Suppose a company works in the industries like tobacco, alcohol, adult entertainment, or weapon systems. In that case, private equity funds will stop all support given to these businesses to achieve their ESG goals. Besides, investors do not desire to support organizations that rely extensively on non-renewable energy resources or employ child labor. 

The impact of sustainability accounting and ESG consulting on private equity funds includes how they make buy or sell recommendations for portfolio management insights. 

For example, investors might want to eliminate plastic to protect animals and the environment. A PE firm will ask them to invest in companies offering plastic alternatives. These new composite materials can become biodegradable after standard chemical processing. 

How Can Private Equity Funds Achieve ESG Goals? 

Method #1| Conduct Sustainability Assessments on the Portfolio Companies 

Firms that offer private equity support can assist you in conducting compliance investigations across all the companies in your portfolio. Also, you will want to use different ESG data services to identify corporations that practice environmentally or socially harmful operations. 

Private equity funds must separately list the organizations known for worker exploitation, corruption, improper waste management, and other socio-ecological issues. Also, several ESG inspection metrics make manual categorization time-consuming and impractical. 

Remember, an enterprise might have respectable compliance ratings today, only to lose them later after it acquires another company. Therefore, consulting ESG firms often help private equity funds achieve their ESG goals by overcoming all these challenges. 

Method #2| Expand the Scope of Audits to Examine Supply Chains 

Is it possible that a company in a private equity fund’s portfolio might have significant trade relations with a supplier who has a poor ESG score? Such cases happen more often than you can imagine. 

So, study how a company sources its materials and distributes its production output or services. If the private equity solutions ignore the ESG risks in supply chains, investors will feel betrayed, and the firm offering its investment support will lose its credibility. 

If you claim to be a sustainability-first private equity fund, you must use the ESG data services to examine these supplier network dynamics. Doing so is indispensable if you operate internationally. 

Perform this thought experiment: An IT company using only renewable energy resources might have an impressive ESG rating. However, it might be ordering its hardware equipment from a supplier known for poor e-waste (electronic waste) management. What will the investment managers think about a “sustainable” private equity fund with this IT company in its portfolio?  

Method #3| Cloud-based ESG Intelligence Gathering 

Collecting business intelligence to understand an organization’s environmental, social, and governance compliances happens in many stages. It requires extensive data collection, insight extraction, and report generation. 

Therefore, private equity support firms must leverage virtualized ESG data services. They will benefit from the scalable sustainability accounting inspections powered by the cloud. 

Cloud computing uses remote servers to store extensive databases and perform complex statistical modeling operations. So, ESG-focused private equity solutions can generate sustainability performance benchmarks for their portfolio companies. 

Some reputable ESG consulting firms provide private equity funds with automated intelligence alerts to help them achieve sustainability goals. Additionally, cloud platforms will dynamically optimize resource usage to save energy and reduce carbon emissions associated with advanced computing systems. 

Conclusion 

You have learned about the different methods that allow private equity funds to achieve their ESG goals and respect investor preferences. Sustainable development goals (SDGs) will be essential for a long time. After all, decarbonization and societal inclusion objectives require more efforts for universal adoption. 

Private equity support providers must embrace sustainability accounting principles to stay competitive and relevant. Besides, different international bodies have devised ESG frameworks and guidelines. Professional ESG consulting firms use them to develop investigative and diagnostic data services. 

A leader in private equity solutions, SG Analytics, assists investment managers and corporations in quantifying, benchmarking, and improving sustainability compliance. Contact us today if you want robust ESG investment insights using the latest intelligence technologies.