Private Equity and Sustainability
To respond to the growing consideration of sustainable development issues, and like the entire financial ecosystem, Private Equity (or private equity) is more and more integrating the stakes of Socially Responsible Investment(1). Over the past decade, many European Private Equity managers have been taking into account environmental, social and governance criteria, known as ESG, and have tended to generalize to all players in this asset class.
Recall that investing in Private Equity consists in taking equity interests in unlisted companies at different stages of their development. Therefore, a sustainable investment in Private Equity implies that the selected companies are themselves committed to the challenges of sustainable development. The role of managers, when analysing the business model of the companies studied, is to assess their level of commitment to these issues.
As very often majority shareholders, Private Equity funds benefit from a privileged relationship with business leaders and can invest directly with them for several years to instill a responsible commitment and influence decision-making. Initially adopted as part of a risk reduction approach, ESG criteria are now seen as a lever for creating sustainable value(2).
In order to guide investments and combat “greenwashing”, an abusive practice of using ESG terminology to market renewable strategies that are not really renewable, two sustainable finance regulations have recently been introduced:
SFDR(3) regulations on sustainable development in the financial services sector. This regulation concerns the publication of sustainability information in the financial services sector.
The Taxonomy(4) regulation, establishing a framework to facilitate investments in phase with the energy transition to fight against global warming. Taxonomy aims to define a common alphabet for classifying sustainable activities.
What about Societe Generale Private Banking?
A Societe Generale Private Banking, we integrate ESG criteria into our Private Equity fund selection policy. These criteria are studied as part of due diligence(5) conducted on the funds upstream of their listing and marketing. Such an analysis allows us to understand the processes put in place by management companies and to evaluate their motivation and beliefs on these subjects.
We can count on the evolution of our partners' practices towards more sustainability:
Many management companies in Europe have already put in place ESG policies with referents in charge of formalising the analysis process, setting up improvement plans and monitoring their achievements.
The development of private equity impact funds(6) is also observed and contributes to the evolution of the asset class in this area. An impact fund is a fund that combines two main objectives: achieving profitability and having a social, societal or environmental impact.
After a thorough analysis conducted on the emerging market of sustainable and impact funds, and in order to expand our offer of Private Equity, we are working on the referencing of this type of solutions, focusing in priority on environmental issues, to better meet the demands of our meaning-seeking investors.
(1) A socially responsible investment is an investment that incorporates ESG (environmental, social and governance) criteria, while aiming for economic performance.
(2) Source: How can transformation drive sustainable value creation? - EY, 2021
(3) SFDR: Sustainable Finance Disclosure Regulation – article 8 (sustainable) or article 9 (impact). SFDR regulations are available here.
(4) Taxonomy Regulation available here.
(5) Due diligence: a set of verifications by an investor for a transaction.
(6) Article 9 of the SFDR Regulation.
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