Understanding ESG In The Private Equity Landscape

Aprajita Singh, Amity Law School, Guru Gobind Singh Indraprastha University, Delhi

ABSTRACT

In recent years, there has been a rise in the demand for a sustainable approach to private investments as well as the need to further develop environmental, social, and governance (ESG) areas to enhance investment decision-making in the private equity (PE) industry. Investment in corporations that allocates capital towards sustainable products and services increases the chances of the investment returns and avoids risks associated with an investment that may not bring returns in the longer run. Therefore, investors are seen to be actively seeking demonstration by PE funds to integrate ESG factors in their investment decisions. It has been observed that most limited partners (LPs), as investors, are declining to participate in PE fundraising and some are also withdrawing from investments based on ESG grounds.

The devastating impact of the COVID-19 pandemic on the global economy is the most current and powerful example of the impact of ESG factors on the overall performance of this industry. Due to the extended quarantines and corporate belt-tightening, retail spending figures have descended rapidly, leading to historic high rates of unemployment. However, due to a long period of successful and mindful fundraising, the private equity industry has proven critical to fighting the coronavirus. Reports show that ESG funds continued to experience net inflows at a record pace through the second quarter of 2020, while they also appear to outrank the conventional funds.