The private equity industry’s “notable” progress in sustainability and diversity is being driven by limited partner demands, new research from Boston Consulting Group shows.
GPs are also increasingly aware of the link between improving sustainability metrics and commercial benefits, BCG’s second annual Sustainability in Private Equity Report noted – but added that the journey to net zero for PE firms leaves much work still to be done.
The report said improvement had been notable for PE firms in areas such as renewable energy adoption and gender diversity in the C-suite of portfolio companies.
That progress has been driven not only a response to global environmental challenges, but as a reflection of shifting investor expectations.
BCG said a recent survey of 230 members of the ESG Data Convergence Initiative revealed that 70% of LPs believe companies that effectively manage sustainability issues will command a valuation premium.
About 40% of LPs have dedicated funds toward climate investing, although their approaches vary significantly – ranging from investments in low-emitting sectors to supporting the grey-to-green transformations necessary for global decarbonization.
BCG said its data for the report covers around 6,200 private companies held by more than 260 PE firms around the world.
The report said that while PE firms are making significant strides in driving sustainability across their portfolios, the journey to net zero remains a challenging endeavor.
It said, “Our research found that only 22% of PE-owned companies have a decarbonization strategy in place. This figure highlights a significant gap compared to public companies, where 29% have such strategies.
“However, while private companies are less likely to have a decarbonization strategy in place than public companies, those private companies that do are reducing emissions at a significantly faster rate, underscoring the power of the private equity investment model in driving impact.”
Among private companies that use renewables, the median EDCI company increased its usage to 30% in 2023, up from 28% last year. In comparison, public companies saw a rise from 29% to 32% over the same period.
The percentage of private companies that boosted their renewable energy usage by 25 percentage points or more rose by two percentage points from last year to 12%, compared to just 6% of public companies during the same period.
At the regional level, private companies in North America still lag significantly behind their European counterparts, BCG said, with the median European company – including those that use no renewables at all – sourcing 22% of its energy from renewables compared to just 1% in North America.
Ben Morley, a partner and associate director at BCG and co-author of the report, said, “As sustainability initiatives within the industry continue to mature, better data collection and transparency will enable valuable insights for allocators, managers and portfolio companies alike.
“We see clearly in the data that the private equity industry has an important role to play in driving positive change and transforming sustainability into a competitive advantage for private equity and the companies in which the sector invests.”
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