PEIs ponder the implications of sustainability on performance and reputation

Several leading private equity investment (PEI) firms have embraced the importance of assessing sustainability and environmental risks and opportunities in making investment decisions.  It was only four years ago that a major private equity organization partnered with the Environmental Defense Fund to establish the first “green portfolio” of companies, focused on environmental performance improvements.  In a relatively short amount of time, there is substantial interest in reviewing social, environmental, and governance factors that might produce tangible and sustainable improvements in business performance and profitability.

PEIs are a natural target

It makes sense that private equity firms were targeted for action in this area.  After all, the management of these firms is well positioned to incent their member and portfolio companies to prioritize sustainability and environmental issues as top value drivers and as a means to surface risk management concerns.  In addition, as PEI involvement has evolved and matured, sustainability/environmental factors have become a greater part of the acquisition decision process; these factors can be strategic drivers imbedded in the due diligence process to help identify a company’s potential for value improvement.

For some time, Deloitte has taken the view that investor interest in social and environmental responsibility matters will continue to grow.  But we also recognize that it can be more difficult to identify and assess risk in turbulent times, and these certainly are times that present special challenges on many levels—from global economic recovery and constantly changing regulatory requirements to rising energy and power costs, and natural resource supply constraints.  Taking all of this into consideration, we work with PEIs to apply a strategic, structured approach involving analysis frameworks that balance portfolio-wide and company-specific priorities across the entire PEI lifecycle.  This approach can help them chart direction and better allocate both resources and management time.  Ultimately, our goal is to help maximize performance and meet intensified stakeholder expectations—including those of investors, business partners, regulators, customers, employees, and consumers. 

Four steps to uncovering value

Toward this end, we developed an approach that helps determine which sustainability risks or opportunities would be most likely to affect a company’s value.  Our approach features four key steps: 1) Identify both existing risks and opportunities as well as use trend analyses to anticipate what will drive future demands; 2) Determine which strategies and initiatives to fund, defer, or reject; 3) Prioritize risks and opportunities based on multiple criteria that will help identify those with the greatest possibility of a positive outcome, and 4) Decide resource allocation that is aligned with capital planning and that offers the greatest long-term benefit and return.

Sustainability is a critical business issue and has significant potential to differentiate investment opportunities, unlock hidden value, and effectively manage risk.  PEIs can get out in front by proactively targeting portfolio companies that effectively address sustainability risk and opportunities and demonstrate that they are managing these matters on a prioritized basis.  It is one potential way of doing what is right while also uncovering value, meeting compliance needs, and elevating brand image.


Kathryn Pavlovsky
Principal
Deloitte Financial Advisory Services LLP

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