Environmental, Social and Governance: A Critical Lever for Private Equity Value Creation

Over the past 20 years, private equity investors have developed a broad set of tools to draw maximum value out of portfolio companies. The focus has shifted from financial engineering to driving topline growth, followed by operational transformation and, more recently, digitalisation. Today, as the world’s attention turns to global issues around climate change, diversity and inclusion, and corporate governance, a new tool in that toolkit has emerged.

Private equity investment continues to grow at a brisk pace, particularly in Asia Pacific, where competition is fierce and the pressure to derive ever-greater value out of already deployed capital is intense. It’s become apparent that no single value creation strategy assures higher returns. Instead, as Vijayalakshmi Vaithianathan, Investment Professional, and Rahul Mukim, Director, at The Carlyle Group assert, “ESG cannot be looked at in isolation from all the other operational levers that are designed to create value as well, because they’re all interconnected.” A holistic, hands-on approach that is tailored to the individual company or industry has been recognized as more likely to yield the desired results.

Now, as environmental, social and governance (ESG) matters move into the spotlight, the financial impact of companies’ response—or lack of response—to them cannot be ignored. To generate maximum value, ESG should be woven throughout a larger, holistic strategy that comprises risk management, operational efficiency, digitalisation and strategy alignment from the earliest, pre-deal stages and revisited throughout the deal cycle.

In this whitepaper, we reflect on value creation from due diligence to exit, why good ESG performance is good business and how maximum value creation begins with total integration and engagement.