In the evolving landscape of finance, the unison of Private Equity and ESG principles is a match made in sustainability heaven. Although these two worlds might appear unrelated at first, their convergence is not only possible but increasingly enticing. In this article, we delve into the motivations behind this union, examining why companies are gravitating toward ESG and why European investors are actively seeking sustainability-related investments.
Why Should a Company Embrace ESG?
Investment Appealing
The appeal of ESG is heightened by its capacity to open up new financing and investment channels. In fact, on the one side, institutional investors are increasingly focusing on companies that are committed to sustainability. On the other side, the compliance with ESG standards can pave the way for a more easily accessible inflow of finance, by unlocking, for instance, access to ESG-liked financial instruments, loans or similar.
Competitiveness
Adopting ESG principles can also help organizations gain a competitive advantage within their market segment. Businesses that adhere to these principles are increasingly appealing as the relevance of ESG integration in suppliers and products selection grows.
Reputation
The transformation of a company's corporate image is a prominent benefit of ESG integration. Organizations that adopt ESG standards are held in greater respect by both investors and the general public. The favorable image created by ESG initiatives not only draws investor interest, but also allows for long-term growth.
Human Resources
The integration of ESG principles within a business organization can also help increasing employee retention, as well as enhancing the talent attraction capability. ESG practices can lead to a growth in the organization value, resulting in a mutually beneficial relationship for both companies and their stakeholders.
“The potential opportunities for businesses, both local and multinational ones, that embrace sustainable development goals are countless and extremely valuable” said Alessandro Cattaneo, van Berings’ Head of Sustainability, “companies must, however, find the right partner to steer them through the process of understanding, embracing, implementing, and managing the core principles of a sustainable development in a business context”.
First step first is the training phase: business’ officers should comprehend the magnitude of the topic and the core principles governing it. Afterwards, the business should identify and prioritize ESG-related risks and opportunities and prepare a long-term strategic plan to address them.
“van Berings can accompany Clients throughout the all process. Our ESG Toolkit helps Clients assess their positioning with respect to applicable UN, EU, domestic and industry related sustainability regulations and guidelines” added Alessandro Cattaneo, van Berings’ Head of Sustainability, “we can help our Clients identify their ESG-related priorities, steer them in the set-up of a long-term strategy, coordinate the various activities to be implemented, and give them full-range legal advice on governance and social issues to be addressed”.
Why Are European Investors Seeking ESG-Related Investments?
For European investors, the appeal of ESG-related investments extends beyond the financial sector. Because of its congruence with larger social ideals and sustainability goals, European investors are increasingly flocking toward ESG-related investments. ESG investments guarantee not just financial gains but also a commitment to tackling global issues ranging from climate change to social inequity. This method enables investors to make a real, positive difference on society and the environment while earning both financial and social rewards.
In summary, the convergence of ESG and private equity is motivated by the numerous advantages it offers, including increased competitiveness, better investment prospects, and enhanced corporate image. Furthermore, European investors are adopting ESG-impact investments, recognizing the convergence of financial rewards with larger societal and environmental aims, confirming the partnership's immense potential.
The EU Legal Framework in a Nutshell
The EU legal framework addressing ESG factors is steadily growing and maturing, mainly focusing on sustainability disclosure.
On the one side, we have Regulation 2019/2088/EU (so called “Sustainable Finance Disclosure Regulation” or – briefly – “SFDR”), which contains transparency rules applicable to financial market participants and financial advisers addressing the integration and management of sustainability-related risks in their operations, as well as the provision of sustainability‐related information with respect to financial products.
On the other side, we have Directive 2022/2464/EU (so called “Corporate Sustainability Reporting Directive” or – briefly – “CSRD”), which imposes to certain businesses (even other than financial market participants and financial advisers) to include in their management report information necessary to understand their impacts on certain “sustainability matters”, as well as the integration and management of such matters within their activity.
The combination of the above regulations (which fall within a comprehensive set of ESG-related initiatives at EU level) is shaping applicable investing policies and strategies of many private equity firms and – in general – institutional investors. In order to better their sustainability “positioning”, such financial players are increasingly looking for and pursuing “sustainable” investments.
“This market trend moving towards the prioritization of sustainability-related matters poses a new challenge both on private equity firms and on target companies” said Luca Lippolis, Head of van Berings’ Banking & Finance Team “to fully integrate sustainability matters within investments, private equity firms must consider ESG factors through the whole investment life-cycle, from target search and assessment, to the elaboration of the investment and divestment strategy”.
