Our surveys show that PE firms have come to regard the sustainability agenda less as a source of risk and more as a wellspring of valueKanpur Investment. Many are also integrating ESG factors into core activities such as due diligenceSimla Stock. What sets leading firms apart, in our experience, is that they identify and pursue ESG-related opportunities at every stage of a deal, from targeting to exit. Here, we set out four practices that can orientate PE investors towards more potential for value creation.
Explore investments in underfunded industries and geographies to establish sustainable deal flow. As businesses and governments step up their efforts to achieve net-zero emissions and other ESG-related goals, new markets for sustainable goods and services should emerge—and enterprises serving those markets will need financial backing. For example, PwC research shows a misalignment in funding for climate-technology ventures: sectors that account for 85% of global greenhouse gas emissions receive just 52% of climate-tech investment. Other PwC research shows that the bulk of financing for green infrastructure flows into developed countries—even though developing regions such as Africa and Southeast Asia have both significant capital requirements and a high degree of “investability.” It’s in gaps such as these where PE firms may find promising opportunities for value creation—especially in sectors, such as infrastructure, where gains accrue over long time horizons.
Factor sustainability into the exit strategy—before making the deal. When planning how they’ll maximise exit returns, PE firms should recognise upfront that companies with strong ESG credentials can yield a premium. After all, ESG investing is on the rise: one recent PwC study projected that ESG assets under management (AuM) would grow from 14.4% of total AuM in 2021 to 21.5% in 2026. And PwC’s 2022 Global Investor Survey found that most investors want companies to report the relevance of sustainability factors to their business model. PE firms can create more value by defining, for each target company, a superior ESG profile in terms of impact on the environment and society as well as alignment with sustainability-related market shifts and regulation. Then they can determine what changes are needed for a target to achieve such a profile, and work on those changes over the holding period so that the company is well prepared for an ESG-enhanced exit.
Look for green incentives and tax savings early in the deal-structuring process. In line with the environmental and social goals noted above, many governments are using green incentives and environmental taxes to encourage businesses to change their behaviours. The European Green Deal, for instance, includes more than 1,000 new or modified levies. In the United States, the Inflation Reduction Act sets out nearly US$370 billion in provisions related to climate change and clean energy. To create additional value, PE firms will want to determine how these policies and programmes apply to a given deal, and then design tax structures that allow them to access the full complement of credits and incentives. One large energy-technology company, for example, found that incentives could pay for up to 50% of the costs of its decarbonisation initiatives.Pune Wealth Management
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