As ESG factors have become an integral part of many businesses, especially over the past couple of years, emerging small and medium-sized enterprises (SMEs) have not derogated from this phenomenon. However, investments are needed in order to help these ESG focused SMEs to grow.

While researching types of investments currently available to ESG businesses, I came across PWC’s Private equity’s ESG journey: From compliance to value creation, Global Private Equity Responsible Investment Survey 2021. It is designed to assess the way private equity (PE) firms view and act in regard to ESG issues, and in doing so, it highlights three key points.

Firstly, the survey notes the increase in awareness PE firms have shown for ESG issues in the past decade. The polarizing effect of these issues has meant that PE firms have integrated ESG issues as part of their business’s culture. The research reports that ‘72% always screen target companies for ESG risks and opportunities at the pre-acquisition stage’ and that ‘56% of firms said ESG features in board meetings more than once a year’. Moreover, the United Nations’ (UN) ‘Sustainable Development Goals’ have participated in building operative frameworks within which ESG issues can be addressed.

That said, this shift in culture and awareness is not, on its own, sufficient to entice PE firms to invest. In fact, the survey underlines the necessity for ESG activities to be, in some way, rewarding for PE firms, creating value. After applying regulations and frameworks to their strategies, PE firms, are now seeing ESG activities as a crucial source of business and profit. From setting consumer and investing trends to having a major role in the innovation process, ESG has undeniably become a major factor for PE firms and their investors.

Finally, the survey indicates that while steps are being taken to include ESG issues in PE firms’ agenda, additional efforts are required. The environmental, social and governance aspects of ESG have previously not been addressed equally.

Actually, when looking at the results 54% answered that their PE firm had taken ‘measures to understand and mitigate the exposure of their portfolios to climate risk’, with 28% planning to do so the next year. As for the social aspect, only 46% of respondents answered ‘yes’ when asked whether their firms had undertaken to set gender and ethnic targets for their workforce. It is regarding governance that higher scores are found with 95% of respondents being concerned by ‘business ethics, corporate values and culture, prevention of bribery and corruption, and cyber and data security’.

ESG focused SMEs have therefore much to look forwards to in the coming years with major investors such as PE firms taking big steps in this field. With that in mind, the survey nonetheless highlights the interest Venture Capitals (VCs) have taken for these same issues. VCs, concentrated on start-ups and smaller businesses, might, to an extent, be more suitable for SMEs looking for smaller investments.

Link to the PWC survey: https://www.pwc.com/gx/en/private-equity/private-equity-survey/pwc-pe-survey-2021.pdf