Data & Intelligence
Sustainable Practices for Private Equity Funds Business
Posted On: 21 Dec 2017 | By Atul Mehta, IFC Director of TMT, Venture Capital and Funds Department, and Morgan Landy, IFC Director of Environmental, Social and Governance Department
There is increasing evidence that companies with strong environmental and social practices perform better financially. Cambridge Associates found that sustainability makes an even stronger contribution to the performance and competitiveness of companies in emerging markets than those in developed markets. This is likely due to weaker regulation in emerging markets: companies that do more than what is required by law set themselves apart from the competition.
We’ve seen it in IFC’s own portfolio. Companies with strong environmental, social and governance (ESG) scores tend to outperform other client companies on return on equity and return on assets. IFC clients with high ESG scores outperformed the MSCI Emerging Market Index, whereas a deterioration in ESG performance resulted in worse financial performance in the range of three to eight per cent. The same holds true for IFC’s investments in private equity funds.
IFC is sharing these data and experience to help our clients develop and implement high standards that can benefit their business.
In early October, IFC’s CEO, Philippe Le Houerou, wrote about IFC’s work with financial institutions and the evolution of our approach, as we seek to create a more responsible banking system and boost financial inclusion globally. IFC has also enhanced its approach to working with private equity funds.
The key components of our approach include dividing private equity funds into categories based on risk and implementing appropriate risk management; reducing our investments in high risk funds; and increasing disclosure of projects our client funds invest in.
We divide private equity funds into three categories — high, medium, and low-risk — based on their prospective investee companies’ activities. We then work with fund managers to implement tools that assess and manage these risks throughout the investment’s lifecycle.