Key Takeaways
- • The World Economic Forum argues private equity investors face escalating pressure to deliver environmental and social impact alongside financial returns, and that failure to act could expose the industry to heightened reputational and regulatory scrutiny.
- • Based on interviews with more than 30 leading GPs, LPs and industry experts, the WEF white paper 'Creating Value through Sustainability in Private Markets' was produced with The Carlyle Group, CalPERS and Boston Consulting Group.
- • The report identifies five 'Monday morning priorities': invest in capabilities and culture, focus on a long-term plan, communicate measurable milestones, transform rather than divest, and collaborate to address key barriers.
- • The authors note that the capability gap is a primary barrier for LPs and GPs, and that portfolios turn over roughly every five years, making asset-level transparency critical.
- • Divestment shifts sustainability-laggard assets to other owners without removing their systemic risk, so the report urges capital deployment to transform these assets.
Summary
Pressure on private equity investors to deliver real environmental and social impact alongside financial returns, often called sustainable investing, has rapidly escalated, according to the World Economic Forum. The article argues that leadership on the issue can position private equity to drive significant social and environmental impact, while failure to mobilize a critical mass of general partners (GPs) and limited partners (LPs) could expose the industry to heightened reputational and regulatory scrutiny. The authors frame the issue as a value opportunity rather than a compliance exercise, noting that the industry's full ownership model and relative freedom from short-term pressures make it well placed to capture value through sustainability.
To assess the state of the industry, the WEF conducted interviews with more than 30 leading GPs, LPs and industry experts. Findings are summarized in the white paper 'Creating Value through Sustainability in Private Markets,' written in partnership with The Carlyle Group, California Public Employees Retirement System (CalPERS) and Boston Consulting Group. The article acknowledges that there is no one-size-fits-all playbook but outlines five priorities. First, investors should invest in capabilities and culture, since capability gaps are a primary barrier; installing multi-stakeholder champions is a first step, but responsibility must extend across the organization. Second, investors should adopt a long-term plan, using private markets' time-horizon flexibility, including lengthening hold periods, even though false starts are likely.
The third priority is to communicate the plan and measurable milestones to stakeholders, combining standardized metrics for comparability with customized reporting. Asset-level transparency is described as critical, given varying asset considerations and portfolio turnover of approximately every five years. The fourth priority is to transform rather than divest. The authors contend that divestment offers quick wins for a single investor but does not remove sustainability-laggard assets from the global market, whose systemic risks will ultimately affect returns across markets. Universal owners with long-term obligations cannot divest their way out of these risks, so capital should be deployed to transform 'grey' assets. Fifth, the industry should collaborate on standards and incentives, with climate-change measures offering a testing ground for broader sustainability collaboration.
The article concludes that private equity is at a critical point in responding to evolving societal expectations on sustainability, presenting financial, reputational and regulatory risks alongside prospects for long-term value creation. The views expressed are those of the author and not the World Economic Forum.
To assess the state of the industry, the WEF conducted interviews with more than 30 leading GPs, LPs and industry experts. Findings are summarized in the white paper 'Creating Value through Sustainability in Private Markets,' written in partnership with The Carlyle Group, California Public Employees Retirement System (CalPERS) and Boston Consulting Group. The article acknowledges that there is no one-size-fits-all playbook but outlines five priorities. First, investors should invest in capabilities and culture, since capability gaps are a primary barrier; installing multi-stakeholder champions is a first step, but responsibility must extend across the organization. Second, investors should adopt a long-term plan, using private markets' time-horizon flexibility, including lengthening hold periods, even though false starts are likely.
The third priority is to communicate the plan and measurable milestones to stakeholders, combining standardized metrics for comparability with customized reporting. Asset-level transparency is described as critical, given varying asset considerations and portfolio turnover of approximately every five years. The fourth priority is to transform rather than divest. The authors contend that divestment offers quick wins for a single investor but does not remove sustainability-laggard assets from the global market, whose systemic risks will ultimately affect returns across markets. Universal owners with long-term obligations cannot divest their way out of these risks, so capital should be deployed to transform 'grey' assets. Fifth, the industry should collaborate on standards and incentives, with climate-change measures offering a testing ground for broader sustainability collaboration.
The article concludes that private equity is at a critical point in responding to evolving societal expectations on sustainability, presenting financial, reputational and regulatory risks alongside prospects for long-term value creation. The views expressed are those of the author and not the World Economic Forum.
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