Stakeholders at the Gate: Driving Financial Value Through Sustainability in Private Equity

Tensie Whelan and Umachander Balakumar

Chapter 3 in Sustainable Investing:Problems and Solutions, 2024, pp 61-107 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Private equity (PE) funds have become majority owners of hospitals, newspapers, schools, real estate, industrial manufacturers, extractive industries, consumer brands, and retail. Worldwide, approximately 10,000 PE firms enjoy ownership rights in 40,000 portfolio companies, which in turn manage 20 million employees. On that scale, PE has a significant influence on corporate behavior, especially when it has majority or controlling interests.PE firm policies and approaches can create value for all stakeholders, including the environment, or extract value to the detriment of other stakeholders (and potentially reduce their own returns). Our research aims to identify how PE can avoid doing harm, as well as provide positive impact. We have undertaken a robust academic review of the state of PE in terms of its contribution to creating or extracting value and developed an accountability framework that provides insights into the various categories of PE impact, both positive and negative. The framework lays out the criteria that investors, civil society, regulators, and others can explore to assess the PE firm’s performance and includes human capital management, financial engineering, strategy and innovation, and societal impact, among other categories. This chapter will provide examples of positive and negative behavior through the lens of the accountability framework, as well as present insights into how sustainability can drive financial value in PE at the firm level.

Keywords: Sustainable Investing; Impact Investing; Corporate Social Responsibility; Materiality; Externalities; Sustainability; ESG; ESG Funds; ESG Factors; ESG Scores; SASB; SDG; DEI; Private Equity; General Partners; Active Ownership; Investment Stewardship; Machine Learning; Natural Language Processing; Large Language Models; Transition Economy; Climate Risk; Net-zero Investing; Divestment; Greenhouse Gas Emissions; Scope 3 Emissions; Modern Portfolio Theory; Venture Investments; Carbon Dioxide Removal; Carbon Credits; Fuel Production; Portfolio Management; Market Sentiment; Factor Investing; Portfolio Optimization; Post-investment Management; Digital Transformation; Fixed Income; Portfolio Performance Measures (search for similar items in EconPapers)
Date: 2024
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