Environmental, social and governance (ESG) investing was growing rapidly among private equity firms before the Covid-19 crisis, due to increasing demands from consumers, improved financial performance, and new government regulations, such as the EU’s Sustainable Finance Disclosure Regulation. But the global health crisis has raised the stakes for corporate responsibility—and it could very well be a catalyst in the widespread adoption of ESG programs. What’s more, evidence is building that ESG investing pays off: In the first quarter of 2020, during the early stages of the crisis, 44% of sustainable public equity funds saw top-quartile performance.
Prior to the Covid-19 outbreak, many institutional investors focused more on environmental factors, such as waste and biodiversity, and governance factors, including fair sourcing and risk management. Current concerns around social factors—such as employee health and safety, community relations, and diversity and inclusion—may encourage investors to take a more holistic approach going forward. As they increasingly find they can do well by doing good, best-in-class general partners will meaningfully integrate ESG factors into their investment strategies.