# A holistic approach to ESG is the best chance of success in a competitive private equity investment market
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-03-06
Category: BUSINESS
Category URL: https://financedigest.com/category/business
Meta Title: The Rising Importance of ESG in Private Equity Deals
Meta Description: Discover how private equity firms can leverage ESG frameworks to mitigate risk and identify value-generation opportunities in the competitive 2022 market.
URL: https://financedigest.com/a-holistic-approach-to-esg-is-the-best-chance-of-success-in-a-competitive-private-equity-investment-markethtml

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_By_ **_James Tetherton,_** _Senior Partner and_ **_Melissa Borschnack,_** _Director, at_ [_GRAPH Strategy_](https://www.graphstrategy.com/)

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James Tetherton, Senior Partner GRAPH Strategy

The value of companies is at an all-time high in 2022, with investors competing intensely to acquire strong, high-growth businesses. The market continues to challenge private equity firms, with large amounts of capital available yet great opportunities becoming increasingly scarce.

In the “traditional” deal making environment, most [investment decisions were driven by financial returns](https://www.financedigest.com/ils-investment-returns-continue-to-outperform-according-to-aon-insurance-linked-securities-report.html "ILS investment returns continue to outperform, according to Aon insurance-linked securities report"). Today, there are more comprehensive measurements of success to consider, including not only financial returns but also environmental, [community and social impacts](https://www.financedigest.com/how-mifid-ii-will-impact-financial-advisor-communications.html "HOW MIFID II WILL IMPACT FINANCIAL ADVISOR COMMUNICATIONS"). Firms are experiencing a cultural shift in which ESG begins to affect almost every aspect of a deal, and is a priority to [build stronger businesses](https://www.financedigest.com/learning-from-the-disrupters-how-finance-brands-can-build-transformative-business-models.html "Learning from the disrupters – how finance brands can build transformative business models").

[Investors must continue to move quickly to complete deals and avoid](https://www.financedigest.com/top-ten-biggest-mistakes-by-novice-investors-and-how-to-avoid-them.html "TOP TEN BIGGEST MISTAKES BY NOVICE INVESTORS – AND HOW TO AVOID THEM") losing out in competitive processes. They also [need to ensure investments](https://www.financedigest.com/5-reasons-why-women-need-to-get-into-property-investing.html "5 Reasons why women need to get into property investing") meet their risk profiles and prove worthwhile in the long run. Firms that leverage ESG frameworks and incorporate them into decision-making processes are positioned to not only mitigate risk, but identify and capture value-generation opportunities in this competitive environment.

![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/melissa-borschnack-director-at-graph-strategy-450x446-1736815997774-compressed.jpg)

Melissa Borschnack, Director, at GRAPH Strategy

**Viewing ESG as a driver of value creation**

Traditional deal analysis tended to treat ESG as a “tick-the-box exercise” – primarily concerned with [managing risk](https://www.financedigest.com/aon-launches-new-catastrophe-model-to-manage-the-risk-of-icelands-most-disastrous-peril-earthquake.html "Aon launches new catastrophe model to manage the risk of Iceland’s most disastrous peril: Earthquake"), rather than identifying new sources of value.

In today’s environment, there is a significant opportunity to use ESG for value creation. Driving meaningful impact should not come at the [cost of driving financial](https://www.financedigest.com/how-much-does-cloud-based-financial-software-cost.html "How Much Does Cloud-based Financial Software Cost?") returns, despite what some seem to think. Instead, it creates a virtuous cycle that helps companies [deliver better results and experiences for their customers](https://www.financedigest.com/how-partnerships-fuel-fintech-innovation-and-help-banks-deliver-a-better-customer-experience.html "How Partnerships Fuel Fintech Innovation and Help Banks Deliver a Better Customer Experience"), communities, and stakeholders. This in [turn helps improve brand](https://www.financedigest.com/is-the-tide-turning-for-chinese-brands-overseas.html "IS THE TIDE TURNING FOR CHINESE BRANDS OVERSEAS?") equity, leading to stronger revenue and returns, creating a win-win cycle.

**The importance of ESG in 2022**

The tide has turned on the perception of ESG and its [importance within a business](https://www.financedigest.com/the-importance-of-intuition-in-business.html "The Importance of Intuition in Business "). Many limited partners (third party investors) have begun asking and expecting [private equity](https://www.financedigest.com/procurementin-european-private-equity-investment-adding-value-to-the-boardroom.html "Procurement in European private equity investment – adding value to the boardroom.") firms to have a philosophy and measurable outcomes with regards to ESG. There is also increasingly complex regulation, including articles 8 & 9 in EU’s Sustainable Finance Disclosure Regulations (SFDR).

It is no secret that younger generations are generally more interested in ESG than their older counterparts. Generations Y and Z are increasingly demanding [businesses to incorporate ESG practices](https://www.financedigest.com/6-practical-tips-for-starting-an-online-business.html "6 Practical Tips for Starting an Online Business"), both as employees and customers, in alignment with their personal values.

**Commercial due diligence and ESG**

From a commercial due diligence perspective, the most effective firms are those that seamlessly incorporate ESG considerations into their broader commercial diligence process.

[Private equity](https://www.financedigest.com/can-private-equity-do-for-africas-manufacturers-what-its-done-for-f1-and-rugby.html "Can private equity do for Africa’s manufacturers what it’s done for F1 and rugby?") firms typically have a limited amount of time to execute deals. Consequently, it can be easy for these [firms to select businesses](https://www.financedigest.com/pizza-firm-dp-eurasia-considers-divestment-of-russian-business.html "Pizza firm DP Eurasia considers divestment of Russian business"), simply because there is a perception of strong ESG practices (greenwashing). However, the commercial due diligence [process is the best way](https://www.financedigest.com/three-ways-that-female-entrepreneurs-can-supercharge-their-hiring-process.html "Three ways that female entrepreneurs can supercharge their hiring process") of ascertaining a company’s current standpoint, as well as its potential. Private equity [firms are seeking](https://www.financedigest.com/some-credit-suisse-at1-bondholders-seek-legal-advice-law-firms.html "Some Credit Suisse AT1 bondholders seek legal advice -law firms") to strengthen their ESG approach, and several are doing so with the following:

1. Establish an ESG policy and philosophy that outlines how the [firm integrates](https://www.financedigest.com/how-green-are-your-investments-why-esg-data-integration-is-key-for-financial-services-firms.html "“How green are your investments?” – Why ESG data integration is key for financial services firms") ESG into its diligence process, which helps employees and partners contribute to meet firm objectives.
2. Integrate ESGs effort across workstreams, recognising the multifaceted impacts that it has across commercial, operational, management, and [financial diligence streams](https://www.financedigest.com/innovation-is-the-path-to-revenue-how-financial-organisations-can-open-up-alternative-revenue-streams.html "Innovation is the path to revenue: How financial organisations can open up alternative revenue streams").
3. Institute a measurement standard for ESG metrics, and during the diligence process, ensure the standards are met or determine what it will take to meet the outlined metrics.
4. Incorporate rigorous analysis into the ESG metrics – some metrics come directly from available data (e.g., amount of pollution, diversity among board members) but others require proper “Voice of Customer” research to verify performance. By conducting investigative interviews with customers, industry experts, former employees, and others, primary research can uncover several insights around ESG (e.g., inclusive culture, workforce safety, customer equity, community impact)
5. Ensure a balanced approach to [consider factors across the full](https://www.financedigest.com/frances-schneider-considers-full-buyout-of-aveva.html "France’s Schneider considers full buyout of AVEVA") ESG spectrum. Private equity firms traditionally over-index on the environmental component of ESG, sometimes at the expense of social and governance factors. A more balanced approach allows for a broader assessment of not only the ESG [risk factors and mitigation opportunities](https://www.financedigest.com/accountants-risk-missing-post-brexit-opportunities.html "Accountants risk missing post-Brexit opportunities") but also value creation.
6. Understand there are a [set of ESG](https://www.financedigest.com/green-bonds-are-set-to-drive-corporate-esg-debt-out-of-slump-in-2023-barclays.html "Green bonds are set to drive corporate ESG debt out of slump in 2023 -Barclays") metrics that will work across industries and companies while also realizing that there will be several types of industries that require unique metrics and/or approaches to ESG.
7. Allow for flexibility especially as you conduct diligence across cultures – there are different expectations between regions and countries (e.g., UK, EU, and U.S.) It is important to consider these cultural standards and expectation differences when looking at a specific asset, comparing it to peers in the industry, [understanding regulations](https://www.financedigest.com/activision-aims-to-help-uk-regulator-better-understand-our-industry.html "Activision aims to help UK regulator ‘better understand our industry’"), or planning for expansion to new geographies.

**A holistic view is** [key to success](https://www.financedigest.com/battling-uncertainty-is-the-key-to-property-investment-success.html "Battling uncertainty is the key to property investment success")

Beyond incorporating ESG into the commercial due diligence at the time of acquisition, private equity firms are best served when they institute an ongoing ESG monitoring program into their portfolio operations. This means firms have an opportunity to assess progress on key ESG metrics and identify additional [improvements for their portfolio](https://www.financedigest.com/how-to-use-momentum-analytics-software-to-improve-portfolio-performance.html "How to use momentum analytics software to improve portfolio performance") companies.

Therefore, when it comes [time to sell](https://www.financedigest.com/best-selling-books-of-all-time.html "Best selling books of all time"), private equity companies can highlight how ESG priorities and improvements contributed to the financial success of their investments. Ultimately, this virtuous cycle allows the [firms to demand higher](https://www.financedigest.com/polish-e-commerce-firm-allegro-eyes-higher-q1-profit.html "Polish e-commerce firm Allegro eyes higher Q1 profit") returns upon exit.

It is an exciting time in the industry as the [private equity community is embracing ESG’s ability to drive positive impact](https://www.financedigest.com/4-trends-that-will-have-a-major-impact-on-private-equity-in-2021.html "4 Trends that will have a major impact on private equity in 2021") across the ecosystem of investors, employees, customers, communities, and stakeholders.

**_About GRAPH Strategy_** **:**

GRAPH Strategy is a specialist strategy consulting firm that supports leading global corporations, private equity and credit [investors invest](https://www.financedigest.com/why-are-investors-checking-out-of-uk-buy-to-let-and-checking-in-to-hotel-investment.html "WHY ARE INVESTORS CHECKING OUT OF UK BUY-TO-LET AND CHECKING IN TO HOTEL INVESTMENT?") in and build stronger businesses. We adopt a rigorous, evidence-based [approach to identify market](https://www.financedigest.com/uk-property-market-braced-for-influx-of-chinese-buyers-as-golden-week-approaches.html "UK property market braced for influx of Chinese buyers as Golden Week approaches") opportunities, conduct commercial due diligence and design winning growth strategies.


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