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Social and environmental issues are increasingly affecting consumer behavior and business conditions, and funds are hearing the message. While the level of commitment currently varies—from firms that focus solely on ESG risk mitigation to impact investors—several signs indicate that building ESG factors into investment strategies will soon be the norm.
First, investors are starting to realize that ESG investing isn’t just about doing good for the sake of doing good. In 2019, public top-quartile ESG performers had a significantly higher total enterprise value-to-EBITDA multiple than the average in several sectors, including oil and gas, packaging, paper and transportation.
These are public equities, not private funds or assets. But limited partners (LPs) are starting to make ESG a priority: Sixty-five percent believe ESG will become a standard practice in the next five years. They are also increasingly convinced that ESG investing can pay off by increasing alpha and mitigating risk. Feeling the mounting pressure from LPs, more general partners (GPs) may incorporate ESG factors across the deal life cycle.
Finally, funds are increasingly linking debt to ESG performance. For instance, in June, EQT announced an ESG-linked subscription credit facility, which incentivizes portfolio companies to meet certain ESG objectives. With a more tangible commitment to environmental and social goals, funds can have meaningful impact while creating financial returns.
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First published in August 2020