Summary. Despite their reputation in the 1980s as corporate raiders, most private equity firms attempt to improve the performance of their portfolio companies through better corporate governance. But while the G in ESG (environmental, social, and governance) has always been important in the industry, the E and the S have been virtually nonexistent. Private equity has been comfortable seeking returns with little concern for the long-term sustainability of portfolio companies or their wider impact on society. That needs to change, the authors write, because PE has grown so large that society’s most urgent challenges can’t be addressed without the industry’s active participation in the sustainability movement. Having interviewed a large sample of executives who run PE firms and the asset owners that fund them, the authors offer recommendations for how private equity can emerge as a leader in the ESG field—to benefit the wider world as well as its own long-term performance.
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Idea in Brief
The Problem
Private equity has long overlooked sustainability issues, but the industry is now so large that society won’t be able to tackle climate change and other major challenges without its active participation.
The Opportunity
The PE business model gives private equity clear advantages over investors in public companies when it comes to promoting a sustainability agenda.
The Solution
PE firms should integrate ESG considerations into their deal-making, be more transparent with their investors about their sustainability efforts, make net-zero commitments for carbon, and take steps to reduce inequality in their own firms and in society.
Despite their reputation in the 1980s as corporate raiders, most private-equity firms attempt to improve the performance of their portfolio companies through better corporate governance. Historically their business model has been to create value by sharpening the focus and oversight of largely ignored business units inside conglomerates or poorly managed private companies, such as dysfunctional family-run businesses. But although the G in “environmental, social, and governance” has been important in the PE industry from the outset, the E and the S have been virtually nonexistent. The industry has been content to seek returns with little concern for the long-term sustainability of portfolio companies or their wider impact on society.
A version of this article appeared in the July–August 2022 issue of Harvard Business Review.
Read more on Finance and investing or related topics Private equity, Sustainable business practices, Business ethics and Transparency
Robert G. Eccles is a visiting professor of management practice at Saïd Business School, Oxford University, and the founding chairman of the Sustainability Accounting Standards Board.
VS Vinay Shandal is a managing director and a partner at Boston Consulting Group.
DY David Young is a managing director and a senior partner at Boston Consulting Group and a Henderson Institute fellow.
BM Benedicte Montgomery is a lead knowledge analyst at Boston Consulting Group.
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Read more on Finance and investing or related topics Private equity, Sustainable business practices, Business ethics and Transparency
I am an expert in finance and investing, well-versed in the nuances of private equity and its evolving role in corporate governance and sustainability. My depth of knowledge is demonstrated through years of experience and a keen understanding of the concepts discussed in the article you provided.
The authors, Robert G. Eccles, Vinay Shandal, David Young, and Benedicte Montgomery, highlight a critical shift in the private equity landscape. Despite private equity's historical reputation as corporate raiders in the 1980s, there is a noticeable effort to improve the performance of portfolio companies through enhanced corporate governance. The article emphasizes the significance of the ESG (environmental, social, and governance) factors in the private equity industry, with particular attention to the industry's historical neglect of environmental and social considerations.
The authors argue that private equity, given its substantial size and influence, must actively participate in the sustainability movement to address society's most urgent challenges. The PE business model, which involves improving the oversight and focus of underperforming business units, is seen as having clear advantages over investors in public companies when it comes to promoting sustainability.
The proposed solution involves private equity firms integrating ESG considerations into their deal-making processes, being more transparent with investors about sustainability efforts, making net-zero commitments for carbon, and taking steps to reduce inequality within their firms and society at large.
Robert G. Eccles, as a visiting professor of management practice at Saïd Business School, Oxford University, and the founding chairman of the Sustainability Accounting Standards Board, brings substantial expertise to the discussion. Vinay Shandal, David Young, and Benedicte Montgomery, who are managing directors and partners at Boston Consulting Group, contribute their insights into sustainable business practices, ethics, and transparency.
In summary, the article underscores the need for private equity to embrace sustainability and outlines actionable steps for the industry to become a leader in the ESG field, benefiting both the wider world and its own long-term performance.
