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How COVID-19 could impact private equity's approach to ESG


“RSM has been tracking attitudes to ESG in the US middle market for some time. While change was already occurring, the coronavirus has the potential to shift the dial considerably.”

—Anthony DeCandido, RSM Partner, Financial Services Senior Analyst

The COVID-19 crisis has the potential to considerably shift attitudes concerning the integration of environmental, social and governance (ESG) considerations in the middle market. Anthony DeCandido, RSM financial services senior analyst and audit partner, speaks with Private Equity International and offers insights on how COVID-19 could impact private equity's (PE) approach to ESG.

What progress has been made in private equity’s approach to environmental, social and governance issues in recent years?

There has been a growing interest in private equity being able to demonstrate that it can do good in the world and not just generate financial returns. There is also some evidence from the programs that exist, particularly in the larger private equity funds, that a commitment to ESG can drive even bigger financial returns than might otherwise have been achieved.

The risk element to this is now something that is going to be of special interest to private equity firms. COVID-19 is just an example of one of the business risks that companies need to prepare for even if they don’t necessarily know what those risks are.

Before the crisis, our clients were increasingly talking about climate change, social inequality and issues such as water shortages. But where a firm’s interest lies depends very much on the type of industry that the firm is investing in. While this is key for firms of all sizes and strategies, we find firms that are larger generally have more infrastructure to get organized, more resources to prepare deliverables, and they also probably have more of a community blueprint so there is a higher expectation of them.

In the middle market, the approach is more mixed. Those groups don’t always have the same people resource, or even the financial resource, to drive these changes. This means that, although they recognize that ESG is a strategic priority, very few of them have organized fully. Our recent Middle Market Business Index survey shows that only 39 percent of middle market executives reported being familiar enough with ESG issues to evaluate the performance of their organizations. There is now a growing interest in data-driven insights to prove that a company’s behaviors are, in fact, driving different risk and financial outcomes. However, when compared with listed funds or hedge funds, there still seems to be a slightly lighter ESG blueprint for private equity. Because these funds are private, they may not always view their level of fiduciary ESG responsibility to be as great as perhaps some of the larger funds or those that are public.

How could COVID-19 impact the industry’s commitment to ESG moving forward?

Over the next three to six months, most businesses are going to be focused on sustaining their operations – keeping the lights on and keeping people employed. I don’t believe they are going to be focused on devoting either their people resource or their financial resource to ESG today. But in the back of people’s minds, this is something that they know will be a strategic priority once the dust settles.

The impact of the virus is going to be significant in the long term. The volatility that we have seen in financial markets recently, and the ensuing concern among investors, is going to drive a growing trend for investors to grill their funds on their business practices. So, in the long term, ESG is going to move up the agenda.

In the short term, it’s going to be more difficult to predict. Right now, the spotlight is very much on disaster preparedness, continuity planning, employee treatment and so on. Those things were ancillary to ESG before the coronavirus outbreak, but investors are going to be much more focused on those going forward. There have been some high-profile CEOs and companies that have made headlines for the way in which they are taking responsibility for the care of their employees and contributing in different ways to the relief effort. However, there will be a lot of companies that will suffer through the financial hardship that’s occurring.

Private equity has a lot of dry powder available and, in many cases, investments that funds had in the pipeline have either been delayed or abandoned. When travel restrictions ease and people begin to return to their offices, I expect to see a major pop in private equity and investors asking a lot more questions about how companies have behaved throughout the crisis.

For more insights on how COVID-19 could impact PE's approach to ESG, read the full article.

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