brief INSIGHT by Aberdeen Standard Investments

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By their very nature, private equity firms find themselves able to exert influence on the businesses in which they invest. Encouragingly, many are becoming increasingly aware of the positive impact that good environmental, social and governance (ESG) practices within portfolio companies can have on investment returns.

Currently, Europe leads the way in terms of ESG integration. Responsible investment tends to be incorporated into company due diligence and value creation plans. Traditionally, this included strengthening the company’s management team, improving financial reporting and enhancing governance. Recently, private equity firms have increased their focus on initiatives designed to have a positive environmental or social impact. This includes improving production and resource efficiency, increasing diversity, or reducing waste and emissions. Improvements in these areas can make the company more profitable and marketable. They can also have a positive effect on the valuation of a business when it is sold and, ultimately, on investment returns.

As for the future, we expect responsible investing in private equity to increase in importance as private equity managers seek to differentiate themselves and to add value to companies above and beyond traditional methods. We also believe that private equity investors, such as ourselves, will continue to play an important role in allocating capital to those firms with robust ESG practices.

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