How can private equity implement a robust ESG strategy?

April 10, 2024
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If you're a private equity firm seeking to make a positive impact on people and the planet while aligning your investments with ESG considerations, then you're making a wise choice.

In a world finding ways to adapt and mitigate climate change, prioritising financial returns is no longer enough.

Companies across the world are reassessing how ESG considerations are affecting their organisations and how embedding these considerations can help them reap the benefits of increased accountability, improved risk mitigation, and greater opportunities for growth and success.

By integrating an ESG strategy into your investment process, you can position yourself for long-term success while contributing to a more sustainable future for everyone.

Here's a step-by-step guide to help you embed ESG into your funding portfolio and start reaping the benefits of a more holistic investment approach.

Don't miss out on the opportunity to drive change and achieve your investment goals!

1st Step: Conduct Your Own Materiality Assessment

To align any organisation with ESG considerations, the first step is to conduct a materiality assessment.

It helps identify the most significant ESG factors that could impact your fund's investments.

You need to analyse the ESG issues that are most relevant to your investments, such as industry-specific issues or factors that could impact financial performance.

However, it's important to not only consider the financial impacts of ESG factors on your fund's value but also the broader impacts on society and the environment.

This is why we advocate for a double materiality approach when conducting your materiality assessment.

Double materiality is a more comprehensive approach to materiality that considers not only the financial impacts on a company's activities but also the company’s impacts on the environment and society.

It recognises that a company's actions can have both internal and external effects, which can affect not only its financial performance but also the well-being of the broader community and the planet as a whole.

This allows you to identify the material issues most relevant to your fund's investment strategy, values, and purpose.

By prioritising ESG factors that matter most, you can develop a plan to integrate them into your investment process and achieve sustainable long-term growth.

To sum it up, these are the four steps you should follow:

Step 1: ESG issues’ universe

In this step, you will identify the universe of ESG issues that are relevant to your company. This typically involves a review of ESG frameworks and standards, as well as industry-specific issues.

From this review, you will select up to 15 defined ESG issues that are most relevant for your company.

Step 2: Stakeholder Mapping

Next, you need to understand your stakeholders' perspectives on these issues. In this step, you will map your stakeholders, including their degree of importance, influence, and relationships with your company.

This will help you understand who your key stakeholders are and what ESG issues matter most to them.

Step 3: Double Materiality Assessment

In this step, you conduct a double materiality assessment to score the importance of ESG issues. In doing so, it is important to highlight the impact materiality or the company's impact on society and the environment and its financial performance (or, financial materiality).

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This typically involves a quantitative approach, such as a survey designed and sent to internal and external stakeholders.

The survey will ask stakeholders to score the importance of each ESG issue based on its impact on both impact materiality and financial materiality.

Step 4: Double Materiality Matrix

In the final step, create a double materiality matrix combining the aggregated results of the assessment with a qualitative analysis per stakeholder type.

The matrix provides a comprehensive view of your firm’s ESG issues, with each ESG issue scored and reflective of impact materiality and financial materiality.

This matrix will help you prioritise ESG issues that matter most to your stakeholders (including 5 to 8 material issues) and develop a plan to integrate these issues into your business strategy.

Learn more about how to conduct a materiality assessment here!

2nd Step: Develop Your ESG Strategy

An ESG strategy is a broad term used to describe how an organisation integrates ESG considerations into its investment portfolio and decision-making processes.


To develop an ESG policy that integrates ESG matters into your fund's investment decision-making process, it is important to:

Identify each step of the investment process where you could take ESG into account

Identify every stage of the investment process where ESG factors could be relevant, such as the screening process, due diligence, and portfolio monitoring.

For instance, you could exclude companies that have a poor environmental record in the screening process.

Define your approach to ESG for each step

You should define your approach to ESG for each stage of the investment process.

This could include using a best-in-class approach, exclusionary screening, or thematic investing.

During the due diligence process, you could choose to use a best-in-class approach to identify companies that have strong ESG performance.

For example, BlackRock is one of the world's largest investment management companies. Their approach to sustainability risks is seamlessly integrated at every step of their investment process.

During the screening process, BlackRock uses exclusionary screening to exclude companies involved in controversial industries such as tobacco, thermal coal, and weapons.

They also use positive screening to identify companies that have strong ESG performance.

During due diligence, BlackRock uses a best-in-class approach to assess ESG risks and opportunities for potential investments.

In the portfolio management stage, BlackRock monitors the ESG performance of their investments and engages with companies to drive improvements in ESG practices.

Educate and Train employees on your ESG strategy

Especially those directly involved with investments. This will help ensure that ESG factors are considered at every stage of the investment process.

You could provide training sessions or seminars to help employees understand the importance of ESG considerations and how to integrate them into their work.

By doing so, you can ensure that your fund's ESG policy is effectively implemented and that all employees are committed to its goals.

By developing a robust ESG policy that considers every stage of the investment process, defining your approach to ESG for each step, and educating your employees, you can successfully integrate ESG matters into your fund's investment decision-making process.

3rd Step: Engage with Your Portfolio Companies

When it comes to implementing an ESG strategy, engaging with portfolio companies is essential.

As we learned earlier, performing due diligence on potential investments can be a powerful tool to identify any ESG risks or opportunities that may have an impact on the investment's financial performance.

But once you've invested, you should continue to engage with the portfolio company to monitor its ESG performance and support it in improving its ESG practices.

It's not just about monitoring their ESG performance, but also about helping them improve their practices. This is where you can provide "sustainability as a service" to your portfolio companies.

It can also help you transform your firm’s utility from "investment impact" to "investor impact."

"Sustainability as a service" refers to the support and services provided by private equities to help portfolio companies implement sustainable practices.

You can provide guidance on sustainable strategies, setting targets and goals, and offer access to resources and expertise. The goal is to help portfolio companies become more sustainable and create long-term value for all stakeholders.

There are several ways you can provide "sustainability as a service" to your portfolio companies.

For example, you can provide access to sustainability experts and consultants, offer training and education programs, and help portfolio companies implement ESG policies and practices.

By providing these services, you can help your portfolio companies improve their ESG performance and create long-term value for all stakeholders.

4th Step: Walk the Talk

Identifying material concerns, setting goals and targets, and developing strategies are important to align your firm with ESG considerations. It’s also critical to walk the talk to truly improve your ESG performance.

This means that you should implement the initiatives you’re requiring from your portfolio companies.

For instance, if you require your portfolio companies to have a diversity, equity, and inclusion policy, you should have one in place as well.

It's also important to regularly measure your own ESG performance and make necessary improvements.

By leading by example, you can encourage your portfolio companies to improve their own ESG practices and performance.

This step helps build trust between you and your portfolio companies and even improve your brand reputation!

It can provide opportunities for you to differentiate yourself from your peers, particularly in an increasingly competitive market where ESG considerations are becoming more important to investors.

But this requires ongoing effort and commitment from you.

It requires regular review of your ESG policies and performance to ensure they remain relevant and effective.

Lastly, don’t forget to communicate your progress, including challenges and successes, to your investors, portfolio companies, and other stakeholders. By doing so, you can demonstrate your commitment to ESG considerations and promote transparency and accountability!

Points of Attention

As you follow these steps, keep in mind that you should avoid exhaustive information reporting and focus on portfolio companies' material issues.

ESG metrics collected should be adapted to startups and scale-ups to avoid overwhelming portfolio companies and encourage engagement.

Consider the broader impact of your investments on the environment and society, and invest in companies that have a positive impact on both.

To conclude…

By incorporating ESG considerations into your investment decisions, you can help mitigate risks, identify new opportunities, and create long-term value for your investors.

Additionally, you can contribute to a more sustainable and equitable society.

As ESG investing continues to grow in importance, private equities that prioritise an ESG strategy will be well-prepared for coming regulations and well-positioned to thrive in a rapidly changing investment landscape.

Seize the benefits of ESG investing by taking action now and implementing ESG for your fund with Apiday!

Our Sustainability Roadmap empowers you to navigate your sustainability journey effectively. It helps in pinpointing risks and opportunities, setting clear priorities, and tracking your progress toward achieving your goals.

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How can private equity implement a robust ESG strategy?

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