More than half of private equity managers reported that analysis of environmental, social, and governance (ESG) risks had “often or occasionally” led them to bid a lower price for an acquisition, according to a survey by Capital Dynamics.
Just under a third of the 109 managers surveyed said such analysis had led them to pay a higher price. One in five (20%) said it had a positive impact on material deal financing terms, and 17% said it had a negative impact.
In an accompanying report, Capital Dynamics said that the “value-add stemming from responsible investment/ESG implementation starts from the acquisition of a company as it can enable general partners [GPs] to identify risks, deficient standards, and value creation opportunities”.
The report said the approach could also have a positive impact on exit valuation, but according to the survey ESG implementation at exit is the least developed area.
“Surprisingly, only a quarter of GPs reported that buyers conducted frequent responsible investment/ESG due diligence,” said the report. “The majority of GPs witnessed only an occasional acquisition diligence from buyers.”
Less than a third (29%) of respondents said that ESG performance of a company had affected exit valuation, either positively or negatively.
Just over a third of respondents said they measured and experienced a positive impact on “earnings before interest, tax, depreciation and amortisation (EBITDA) from ESG actions”.
Slightly less – 28% – said higher returns was one of the top drivers of implementing a responsible investment or ESG policy, but three-quarters said they intended to increase their use of ESG for value creation.
The vast majority (80%) agreed or strongly agreed that ESG can increase returns, and nearly as many (78%) disagreed or strongly disagreed that ESG only serves as a risk management tool but does not add value.