Responsible investing in private equity

• Both private equity (PE) and responsible investing (RI) have long-term investment horizons. By fostering the appropriate governance in portfolio companies, PE can facilitate their responsible transformation.
   
• Although the PE industry currently lags in the sustainability journey, it is catching up rapidly.
   
• Over the past decade, RI has been integrated into the different stages of the PE investment process; RI priorities vary across investors, but governance tends to dominate over climate and social elements.
   
• Challenges remain in terms of data availability and the lack of reporting standardisation. Any decision on RI should be taken at the highest institution level, to avoid facing possible mismatches regarding investments’ time horizon.

Academic research supports this view, as PE has been shown to have a positive impact on sustainable innovation, particularly in industries related to the climate transition, and can contribute to the necessary move towards sustainability.

Despite these arguments, the PE industry currently lags in the sustainability journey, at least in the United States which is dominant in the sector whereas European PE firms are more advanced. One explanation for this is that PE firms focus their investments on small- and medium-sized firms that are less equipped to implement an RI strategy.

Investors frequently apply exclusion policies, but some mention a risk that such policies might lead to an eviction effect even though it is key to support brown activities in the transition process.

Challenges remain in terms of data availability, as it is difficult to find information about RI issues in portfolio companies and to measure them consistently. In addition, a lack of standardisation sometimes makes RI reporting a challenge. This has led some investors to join forces, for instance through the ESG Data Convergence Initiative.