ESG Management Takes Center Stage at SuperReturn Berlin

Last week, I attended Europe’s largest private equity event of the year, where 1,400 of the world’s leading private equity sector professionals gathered to discuss the future of the industry, fundraising opportunities and the economic climate.

I spoke at two events: a panel entitled “ESG: Theory vs. Practice – Discerning quality ESG from claims of best practice” and a more informal roundtable discussion on creating value through ESG initiatives, which I was pleased to host. My primary goal was to spread adoption of EDF’s new ESG Management Tool, which defines the building blocks of a successful ESG management program at private equity firms of all sizes.

Four themes of the conference stuck out for me:

1)      ESG management can improve the reputation of the industry. 

Carlyle co-founder David Rubenstein repeatedly mentioned the eroding reputation the private equity sector has experienced over the past several years. When asked how to fix the reputation, he suggested one method is for all GPs to better understand that investors and other stakeholders are interested in more than just financial returns. “They want to hear about the environmental impact of what we do. ESG factors are very important to what we do at Carlyle,” Rubenstein said in his keynote address.

2)      ESG management plays an important role in fundraising.

In an increasingly difficult fundraising environment for GPs, having ESG as a core part of your value creation strategy can assure LPs that the firm is adequately managing risks and identifying opportunities. GPs ignore ESG at their peril, as highlighted by a comment by Dushy Sivanithy, a principal at Pantheon who is a member of their European Investment Committee. “I just met with a GP that stated when he hears ESG his eyes glaze over. We haven’t invested in him in the past and we will not in the future,” Sivanithy remarked during our "ESG: Theory vs. Practice" panel.

3)      ESG management will be increasingly important as natural gas investing spreads worldwide.

Not only is the fracking boom here to stay, but it is quickly going to spread around the globe, as will the related environmental challenges. I learned from William E. Macaulay, chairman and CEO of First Reserve Corp. that China has more shale reserves than we do here in the U.S. This further highlights the importance of EDF’s work in getting the science, policy and best practices for unconventional gas right in the U.S. not only for environmental protection but also the numerous financial risks that exist in shale extraction, as the industry goes global.

4)      ESG management is even more important with continued lower economic growth.

The current economic climate creates an increased need for better risk analysis and operational excellence. Private equity firms are still expected by their LPs to make returns in the 20 percent range, just as they did when interest rates were 5 or 6 percent. With returns across asset classes declining and PE firms still expected to perform as they did pre-crisis, two things will happen. The first is that firms will look to riskier investments and strategies, making improved ESG analysis even more critical in the due diligence process. The second is that operational performance will play a bigger role than ever before in creating value. Firms that can capture the value from ESG initiatives in their portfolio companies by improving ESG performance in areas like energy efficiency, worker productivity and supply chain transparency will outperform their competitors.

My most important take away was that the importance of ESG management is increasingly understood by all the players in the global private equity sector.  It’s not just Europeans anymore but also an increasingly diverse array of global stakeholders that includes GPs, placement agents, insurers and deal professionals that understand the value creation potential of ESG integration.