UN PRI survey highlights “materiality” of ESG in private equity M&A deals

Report shows the impact of poor ESG performance on deals

A new report from the UN-backed Principles for Responsible Investment (PRI) has highlighted the importance of environmental, social and governance (ESG) factors in private equity firms’ mergers and acquisitions activity.

The PRI commissioned consulting firm PwC to assess trade buyers’ attitudes of companies owned by private equity companies.

It found that over 80% of companies had reduced the valuation of an acquisition target – or not gone ahead with a deal – because of poor performance on ESG factors.

And 75% said poor performance had prevented a deal from taking place.

Sixteen corporate buyers from a range of sectors, including Alliance Boots, Centrica, EDF and Xstrata, were interviewed.

“This report shows why ESG considerations should be a fundamental part of any private equity deal making process,” said PRI Executive Director James Gifford. He pointed out that the PRI now has more than 150 general partners as signatories.

He added that the recent decision by Cerberus Capital Management to sell its stake in gun maker FreedomGroup after the Connecticut school shootings “underscores the increasing influence of LPs [limited partners, clients] and the growing materiality of ESG issues on investment risk, return and reputation”.

ESG considerations should be a fundamental part of any private equity deal”

Leading private equity firms such as KKR and Carlyle have made a point of emphasizing ESG. In June last year, for example, New York-listed KKR said incorporating ESG factors was “key” to its success. And Carlyle is working with Dutch pension management giants PGGM and APG to help it improve its ESG practices.

KKR, which signed up to the PRI in 2009, says the principles provide “a common language and set of expectations for our investment partners, our portfolio company management teams, and other stakeholders”.

In March 2012, a PWC survey found that private equity firms expect ESG pressure from investors to grow. Link