## Private Equity’s Growing Influence on Sustainability: A Focus on Net Zero, Gender Diversity, and Investor Expectations
The private equity (PE) industry, with over $8.7 trillion in assets under management, is a powerful force with a growing influence on global sustainability. This influence is driven by both internal motivations and external pressures. GPs (General Partners) are increasingly recognizing the connection between improving sustainability metrics and achieving commercial benefits, while LPs (Limited Partners) are demanding greater emphasis on sustainability from their investments.
Progress and Challenges on the Path to Net Zero
While the PE industry is making significant strides in driving sustainability across its portfolios, the journey to net zero remains challenging. According to Boston Consulting Group’s (BCG) second annual Sustainability in Private Equity report, only 22% of PE-owned companies have a decarbonization strategy in place, compared to 29% of public companies. However, the report reveals a significant advantage of the private equity model in driving impact. Private companies with decarbonization strategies are reducing emissions at a faster rate than their public counterparts. This highlights the potential for private equity to accelerate the transition to a sustainable future.
The Rise of Renewable Energy Adoption
The report also showcases promising progress in the adoption of renewable energy. Among private companies utilizing renewables, the median EDCI company increased its usage to 30% in 2023, up from 28% last year. This is a positive trend, although a significant gap remains between private and public companies in North America. European private companies are significantly ahead, with the median European company sourcing 22% of its energy from renewables, compared to just 1% in North America.
Investor Expectations Drive a Sustainability Focus
The increasing focus on sustainability in the PE industry is not solely driven by environmental concerns but also by evolving investor expectations. A recent survey by the ESG Data Convergence Initiative (EDCI) revealed that 70% of LPs believe companies that effectively manage sustainability issues will command a valuation premium. Moreover, 40% of LPs have dedicated funds toward climate investing, demonstrating a clear commitment to sustainability. This shift in investor priorities is further reflected in the survey’s finding that 85% of LPs expect to increase their prioritization of sustainability-related issues over the next three years.
Positive Trends in Gender Diversity and Job Creation
The PE industry continues to make progress in gender diversity and job creation. The report shows that 77% of PE-backed companies now have at least one woman in the C-suite, outperforming their public counterparts (64%). However, there is still room for improvement at the board level, with only 61% of private companies having women on their boards, compared to 89% in public companies.
Despite broader economic pressures, PE-owned companies are still creating jobs at a higher rate than public firms. They generated four net new hires per 100 full-time employees, compared to just one in public firms.
Looking Ahead: The Importance of Continued Momentum
The PE industry is at a pivotal point in its sustainability journey. There is growing consensus on the importance of integrating sustainability into strategic planning to create value and drive positive impact for portfolio companies. As sustainability initiatives mature, improved data collection and transparency will provide valuable insights for allocators, managers, and portfolio companies alike. The PE industry has a significant role to play in driving positive change and transforming sustainability into a competitive advantage for itself and its investments.
The report highlights the potential of the PE industry to be a driving force for positive change in the world. With a continued focus on net zero goals, gender diversity, and meeting investor expectations, the PE industry can unlock significant value for its portfolio companies while contributing to a more sustainable future.