Private equity is a global industry, but it is nonetheless more prevalent in the European and Anglo-Saxon markets. Although there has been some economic conflux between the two over recent years, not least when it comes to sustainability and ESG criteria, there remain key differences, with Europe really making its mark as the sector moves away from a profit-before-all approach focused primarily on shareholder value to an approach engrained with socially responsible business practices. These differences are focused not just on reputation, but also on method and culture.
The net-zero by 2050 objective of the European Green Deal has certainly kickstarted a culture of sustainable investment in the European private equity sphere. The European Commission has pledged to mobilize at least €1 trillion in sustainable investments over the next decade. Indeed, there are already at least $1.83 trillion of European assets in sustainable investment funds, compared to just $300 billion in the U.S.
Most private equity firms in Europe now consider ESG criteria to be central to their business model, with increasing numbers signing up to PRI. Integrating environmental, social and corporate governance issues into investment strategies is now the norm, and firms are finding that such an approach can also drive value creation, in spite of the parallel pressure from regulators.
A booming market, but under pressure
2021 was without doubt one of the hottest years for private equity. This has resulted in a generally positive outlook about the near future of investments, although this newfound optimism has been somewhat shaken by soaring inflation, rising interest rates and the war in Ukraine. Nevertheless, it seems European PE firms are staying true to their ESG commitments and belief in the revenue-generating power of sustainable business.
“Deal value in the last four to five years has bounced around $500 billion-$600 billion. Getting to a trillion this year Is double what the industry did in 2020 – a gigantic accomplishment…” Hugh MacArthur, head of global PE practice at Bain & Company, told Private Equity International, describing the global boom in PE markets.
The sector is however under pressure anew. Just recently in March 2022, European investors gathered in Geneva for Invest Europe’s annual Investor’s Forum that brings together leading LPs and GPs for “high level peer-to-peer debate and networking opportunities in a non-commercial environment.” It became clear that the threat of Russian aggression is putting considerable pressure on PE’s commitment to ESG criteria, with defense and non-renewable energy investments seeming perhaps less taboo than they would have done before the war. How European investors are able to reconcile sovereignty issues with sustainability seems to be one of the biggest challenges moving forward.
Responsible actions remain at the forefront
Of course, PE commitments to sustainability and socially responsible business practices are here to stay despite the debilitating effects of the pandemic and the war in Ukraine. Dominique Senequier, President and founder of leading French PE firm Ardian has always been steadfast in her conviction that adhering to ESG criteria should be at the heart of any PE firm’s investment strategy, and even more so in times of crisis. “Responsibility has been at the heart of Ardian’s investment philosophy for many years. But it has never felt more relevant or vital to us than now, amid the terrible pandemic that has changed the global economy and our lives. This calamity has forced us all to think more deeply about the health and resilience of our societies. In bringing great economies to a standstill, it has focused our attention more than ever on human values and the things that join us to each other,” said Senequier, in Ardian’s 2020 sustainability report.
Many European PE firms’, including Ardian’s, long-term investment strategies are evermore focused on sustainable companies as many believe them to have the greatest long-term value to all stakeholders.
PAI partners, another French-based PE firm with a large investment portfolio around the globe, has also highlighted its commitment to sustainable investment. The firms former head of ESG and sustainability, Cornelia Gomez, recently moved across the channel and joined General Atlantic to improve its ESG strategy and in particular improve its environmental impact. “I’ve seen first-hand what can be achieved when organizations with a global network support bold and comprehensive ESG programs, and I’m proud to be joining a firm that understands and supports this critically important work. I look forward to working with the team to ensure that ESG becomes a transformative value creation lever as General Atlantic continues to scale high-growth companies that are building the future,” said Ms. Gomez.
It would seem that this school of thought is also catching on across the Atlantic. Just last year Goldman Sachs newly established Sustainable Investment Group raised more than $800 million for its Horizon and Climate Solutions Fund. KKR, BlackRock and Apollo Global Management all have similar schemes up and running.
According to the Principles for Responsible Investment, the three main ESG challenges for European PE firms are focused on climate change, Diversity, Equity and Inclusion (DEI) and data. Indeed, firms are beginning to introduce climate strategies and measurable goals, although this can be a real problem for firms with one foot in the oil and gas industry, and most are also “increasingly tying their investment decisions and teams’ incentives to ESG considerations and empowering investees’ management.”
“Although challenging to structure, the future of the industry will likely include a direct link between the attainment of sustainability goals and a part of the private equity firms’ compensation (carried interest),” according to the PRI.