The Growing Importance of ESG in US Private Equity

ESG, Environmental, Social, and Governance, is gaining increasing attention in the US private equity market. With the increasing focus on sustainability and ESG rating, private equity strategies have taken a closer look at ESG considerations.

This article will discuss the quantitative perspectives on US private equity in terms of ESG and recovery post-COVID-19.

Definition of ESG

Environmental, social, and governance (ESG) is an investment framework considering the non-financial risks, performance, and opportunities associated with investments. ESG encompasses board effectiveness; corporate culture; customer satisfaction; anti-corruption protocols; climate change risk identification; human capital development and management; data privacy; human rights policies; and diversity.

When a private equity firm engages in ESG due diligence, they seek not only to invest funds in the most profitable opportunities but also to make investments that align with their values and promote positive societal change. This form of investing often considers the potential environmental or social impact to help investors make informed decisions. Investors who want to incorporate ESG criteria into their decision making must use qualitative evaluation methods when performing a company or portfolio evaluation before formally committing capital.

In recent years, there has been a growing emphasis among both retail investors and asset managers on considering ESG factors while still seeking competitive returns. As a result of this focus on responsible investing, more private equity firms have integrated ESG into their investment strategy by actively integrating sustainability criteria into their operations processes, conducting impact assessments for potentially new investments, focusing on developing longer-term relationships with stakeholders such as customers or suppliers, and vetting based on compliance with important ethical standards or regulations.

Overview of ESG in US Private Equity

Environmental, social, and governance (“ESG”) considerations have become more prominent in the US private equity market. As a result, investors increasingly prioritize ESG performance when analyzing returns, balancing increased financial scrutiny with widening ESG objectives around sustainability goals.

Various states have recently strengthened their ESG regulations and guidelines concerning executive compensation, disclosure requirements, environmental regulations, and political spending transparency. As a result, asset managers must actively engage in the sustainability analysis when weighing potential investments. As a result of this trend, US asset managers must assess their risk exposure while also developing an understanding of the changing regulations around sustainability across US regions.

This Quantitative Perspectives overviews key developments in ESG-centered investing within the US private equity space by looking at current market adoption trends and highlighting investor expectations for returns from portfolios incorporating sustained ESG practices. Additionally, it examines regulatory trends around ESG considerations and peers into potential opportunities for portfolio companies in a post-pandemic recovery environment that supports sustainable business practices in greater measure than before.

Quantitative Perspectives

Environmental, Social and Governance (ESG) metrics have rapidly become a core US private equity investing component.

This section will explore quantitative perspectives on the current and future importance of ESG in US private equity markets. We’ll look at how ESG influences deal flow, portfolios, returns, and valuations and discuss the role of ESGs in driving the recovery and beyond.

ESG Performance of US Private Equity Funds

In recent years, Environmental, Social and Governance (ESG) considerations have taken on increasingly prominent roles in evaluating the performance of US private equity (PE) funds. As the number of institutional investors with ESG programs expand and the number of ESG-oriented investments increase, many PE funds seek to improve their ESG performance.

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The significance of monitoring ESG indicators can help ensure that a firm complies with industry best practices, protects them from potential legal risks, and attracts new investors. There are also financial rewards for pressing ahead with an effective ESG strategy— research shows that companies who adopt better governance practices tend to out-perform peer firms in terms of share price movements and profitability over time.

The US private equity landscape is highly competitive and the sudden trend may seem difficult for a PE firm without an established process or structure. However, developing a comprehensive strategy from scratch can be time consuming and require considerable resources such as data collection tools, cross-checking procedures and reporting systems to ensure its success.

Firms must tread carefully — not taking action when improving their ESG performance could leave them exposed during bear markets in which poorly managed companies suffer far greater losses than those with robust corporate governance frameworks. Furthermore, failing to embrace the growing demand among current & prospective LPs for better reporting standards on sustainability issues threatens to put potential investors off committing capital investment into their fund. As such, US private equity firms should prioritise enhancing their ESG record keeping efforts if they wish to remain competitive within this powerful asset class likely surge beyond recovery into 2021 & beyond.

ESG Impact on US Private Equity Returns

The implications of ESG on returns within US Private Equity (PE) have been hotly debated in recent years. However, many studies indicate a positive correlation between ESG compliance and higher returns. In addition, data from the past ten years shows a noticeable funding halo for more ESG responsible funds, enabling them to raise larger funds during their respective fundraisings with little to no difference in success rate from non-ESG compliant alternatives. As such, there is a growing consensus that the quantitative impact of improved ESG compliance is an important factor companies should consider when making investment decisions in this industry.

Moreover, as further evidence of the potential value that ESG can bring to US PE, The Global Impact Investing Network (GIIN) found an 80% increase in direct investments into companies who have integrated ESG criteria into private investment since 2016. Historically low interest rates also push investors towards utilizing alternative assets including US PE. At the same time, they continue to search for opportunities that meet their return requirements while meeting their sustainability agendas.

In addition to improved returns, multiple studies on long-term investments have revealed greater resilience among portfolios that are heavily weighted towards companies with high ESG ratings. For example, one study analyzing portfolio holdings by mega money managers during the 2008 financial crisis found that sustainable investments outperformed non-ESG compliant portfolios during market distress and continued this trend throughout the recovery period. Overall these findings indicate that adhering to Responsible Investment initiatives through consistent evaluation and implementation will produce an edge in both absolute return performance and risk management within US PE markets over longer time horizons.

ESG Integration in US Private Equity Investing

Economic, Social, and Governance (ESG) investing has become increasingly important for US private equity managers in the last few years. As a result, ESG engagement has gone beyond a simple compliance exercise to integrating ESG principles into their investment considerations.

ESG integration provides investors with a holistic picture of how a portfolio or asset’s underlying value and risk are affected over time by economic, social, and governance-related drivers. This can be achieved by assessing each portfolio company’s ESG risks, evaluating long-term impacts on value and opportunities for impact investing, and incorporating ESG frameworks into due diligence processes.

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US private equity firms are taking action across various stages of the fund life cycle to integrate ESG considerations into their operations. This can include putting in place meaningful policies to ensure that responsible standards are met during the deal screening process; undertaking comprehensive due diligence to identify material ESG risks and opportunities; incorporating sustainability objectives into monitoring activities throughout ownership periods; and working towards realizing exit strategies with positive environmental, social and governance outcomes.

Furthermore, US private equity funds have adopted different strategies for “delivering value for society” such as making minority investments in more sustainable companies; providing liquidity events which can benefit larger communities; developing impact reporting frameworks which measure the performance of companies against predetermined metrics; forming gender leadership programs; advocating for diversity in board composition across sectors and asset classes; introducing eco-labels initiatives or circular economy plans that outline specific initiatives related to sustainable energy or reducing emissions associated with portfolio companies’ operations.

At the same time, US private equity managers need to work closely with investors towards development of common goals related to responsible responsibility — such as including clear provisions about environmental practices within LP-GP agreements and setting up sustainability commitments within contracts — to build trust regarding continuous improvement around environmental criteria along the fund life-cycle from deal origination until exit stages.

Quantitative Perspectives: US PE: Recovery and Beyond

In the past several years, the US Private Equity (PE) market has continually taken on increased significance as a main asset class for investors looking for differentiated returns and higher yield potential. Moreover, with the US economy beginning to slowly recover from the pandemic-related economic fallout, it is increasingly important for investors to have a quantitative understanding of the ESG performance of the PE market.

In this article, we will explore the latest scientific evidence of the influence of ESG on the performance of PE investments and its potential implications for the industry in the period ahead.

ESG Impact on US Private Equity Performance Post-COVID-19

The impact of ESG (Environment, Social, Governance) considerations on private equity (PE) can no longer be denied. Firms are now evaluating how best to capitalize on investments incorporating sustainability goals. Although there were signs that investors were increasingly looking to maximize potential returns while considering ESG principles before the COVID-19 pandemic, the shift towards sustainable investing has accelerated due to its alignment with investor preferences and growing importance of ESG criteria in deal structuring. Now more than ever, PE firms are proactively incorporating emission reduction strategies and other environmental considerations into their portfolios.

Quantitative evidence suggests that investments with meaningful ESG factors have improved post-COVID-19 relative to those without such considerations. Within US PE, EDG scores appear to be transferring into outperformance over time. This is likely due to company best practices since they may attract higher premium multiples as the competitive landscape expands. Focus areas such as gender diversity initiatives tend to lead improvement in returns with several studies finding that a majority of gender diverse firms within their sample outperformed those without similar emphasis on gender diversity.

Additionally, technological advancements such as cloud computing or AI have become integral aspects of a well-rounded digital strategy in addition to traditional performance boosting operations thus permitting firms an increased capacity for an increased efficiency when making decisions regarding portfolio management or risk mitigation associated with potential deals going forward. This new dynamic requires more active participation from senior executives and suggests the importance of corporate governance when evaluating prospective investments within US PE markets.

ESG Investing Strategies for US Private Equity

Investors worldwide have intensified their focus on Environmental, Social and Governance (ESG) investing, driving increased demand for ESG-driven private equity (PE) investment strategies. US PE has experienced a realization that ESG should be an integral element of the overall investment thesis — not simply a function of corporate social responsibility — and investors are keen to understand the quantitative benefits and risk mitigation that incorporating an ESG approach can bring.

The quantitative opportunities and considerations associated with US PE have become increasingly important in recent years. For example, an analysis of the financial results delivered by US-focused PE transactions found that those utilizing an ESG lens* created an accumulated internal rate of return of 18%, versus 13% for those lacking such a rigorous approach to sustainability. In addition, adding parameters to further refine transparency between investments made from private companies and those from public companies — namely through shareholder engagement — decreased realized returns by more than 4%. This highlights how ESG criteria can help ensure greater alignment between investor interests, operational performance and strategic direction for future growth.

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Further research into ESG investing finds that it is beneficial from an environmental/social standpoint and a risk management perspective. By assessing components such as team composition, management protocols, governance structure, strategic planning processes and regulatory compliance risks before committing to investing, US PE managers are well poised to mitigate downside risk while capturing several benchmarks of outperformance; this makes incorporating such criteria into any prospectus or fund mandate crucial when assessing top-notch performance expectations in today’s market landscape.

* Includes all the elements of traditional ESG investing (e.g., pollution controls/measures; labor & human rights; community involvement & development) and stewardship practices (e.g., board accountability/liability; long-term financial strategy/model evolution; monitoring/oversight).


As the US private equity market continues to recover and beyond, ESG considerations are gaining increasing importance.

ESG, or Environment, Social and Governance, is affecting not only the private equity industry’s capital flows but also the way it does business, from transparency to ethical values.

This article will explore the quantitative perspectives of this growing trend and why it is important.

Summary of Key Findings

The key findings of this report are as follows:

1. ESG considerations have become more important in driving US private equity investment over the past several years, impacting both used to evaluate potential investments and the performance of existing investments.

2. The coronavirus pandemic further reinforced how rapidly companies need to be able to respond to global societal and economic challenges, elucidating the importance of ESG initiatives even further.

3. Given these developments, GP strategies for 2021 will likely focus on attaining integrated ESG perspectives across target businesses and portfolios to capitalize on tangible value-creation opportunities.

4. Due diligence processes should be strengthened using industry frameworks such as SASB, GRI and IIRC and quantitative analysis that leverages 3rd party data sources such as FactSet and Dow Jones Sustainability Indexes (DJSI).

5. GP/LPs should collaborate on their impact objectives to create capital continuity while providing access to more specialized expertise on ESG topics such as compensation, operations management and board composition.

Implications of ESG Integration in US Private Equity

Integrating ESG factors into the US private equity (PE) decision-making process has become increasingly important. Moreover, in the wake of the COVID-19 pandemic, this integration is likely to become even more important in the near term with investors, both institutional and individual, seeking to enhance their portfolio resiliency and resilience by investing in ESG related assets.

Integrating ESG considerations into private equity investment strategies should help strengthen portfolio performance. For example, it may deliver higher returns by aligning capital with companies that outperform peers on discrete ESG criteria or have a greater potential for long-term value creation. Additionally, it could create greater flexibility to seize opportunities that could otherwise be missed through a traditional ESG scoring system.

The current macroeconomic climate also provides a unique opportunity for firms to take a closer look at private investments that bring together financial returns and social or environmental benefits. While a commitment from GPs is essential for successfully integrating ESG considerations into PE strategies, there is also value in engaging limited partners via direct conversations with company management teams and other stakeholders to determine whether they are committed to broader sustainability goals and objectives with their business plans.

Finally, various experts cite the need for increased transparency surrounding impact measurement including standardized reporting systems and guidelines addressing how GPs are measuring performance across different lifecycles —from pre-investment due diligence processes through exit monitoring stages—as well as methods of sharing such performance data will be key steps in bringing further clarity to quantitative perspectives on US PE recovery and beyond.

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