The importance of investing responsibly has become more evident than ever to private equity investors. It’s their way of acknowledging the relevance of environmental, social, and governance factors on the market’s long-term health and overall stability.
What Exactly Is Responsible Investment?
Responsible investment recognizes that well-functioning and well-governed social, environmental, and economic systems will generate sustainable returns in the future. It’s a type of investment that combines non-financial and financial value creation. It doesn’t only create long-term social, environmental, and economic value, but also correctly assesses their potential risks.
Responsible Investment In Private Equity
Private equity is naturally suitable for responsible investment because of close contact between the general partner and company management. Another reason is that it also places a strong emphasis on stewardship.
Private equity investors are now starting to invest responsibly, and for good reason. Firstly, the identification and management of social, governance and environmental (SGE) issues across the investment portfolio will not only protect but also significantly enhance investment value. Secondly, responsible investment also marks the fund’s operational excellence, demonstrating fund management that’s both transparent and strategic.
Below is a closer look at why private equity investors are investing responsibly:
1. Making A Difference In The Face Of Environmental Degradation And Climate Change
For private equity investors who care about the challenges that the environment currently faces, especially climate change, responsible investment is the way to go.
The environment and private equity companies can do better with the help of investors who would like to work on improving the world, not only for themselves but also for future generations. With more private equity companies starting to implement responsible investment policies, investors have realized that it’s high time for them to make a positive impact.
With environmental sustainability now becoming more mainstream, savvy investors have already started to factor in the consequences of socio-environmental policies into their assessment of the future value of a company. According to Charlene Pedrolie of SSGC Holdings, private equity companies must consider creating partnerships with environmental experts, designing environmentally-focused investment practices, and assigning financial value to green outcomes.
Private equity (PE) investors who have already started to invest responsibly believe that channeling their investment money towards companies and funds that have positive environmental management policies directly encourages positive corporate behavior. Other environmental challenges confronting the 21st century that get influenced by private equity investors engaging in responsible investment are water, energy, and food scarcity, among others.
2.Enjoy Competitive And Sustainable Returns
A sound investment strategy results in responsible investing and competitive returns, and it’s another reason why PE investors have already started doing it. They’ve already begun to invest their money in line with their values for positive, sustainable outcomes. Responsible investment policies won’t only help impact the world positively, but also help investors financially in the future.
3.Hold Companies Accountable
With responsible investing, PE investors can hold companies accountable for important governance and ethical issues. They can also demand greater accountability on the environmental and social practices of companies.
The need to demand greater accountability resulted from the global financial crisis (GFC) that devastated individuals and communities around the world. Since then, investors have found a way to make their voices heard on issues regarding corporate responsibility that concern them.
The global financial crisis also resulted in a widespread public belief that rebuilding among companies and financial markets needs to take place for improved governance standards, ethics, and regulatory frameworks to materialize.
PE investors who have started investing responsibly believe that the economy will only recover from the GFC if there’s a real and enduring change. For them, the responsible investing can address the investment risks associated with SGE and ethical issues.
4.Rewarding Ethical Companies
PE investors also now see the importance of responsible investing as a way to punish companies that act unethically while rewarding those that are in compliance with expected standards.
PE investors have realized that their investment capital is the most tangible way possible to support companies that want to start making more responsible choices. With more and more people now opting to invest in socially responsible companies, significant social change looks to be achievable in the long run.
5.Support Long-term Wealth Creation
Private equity investors have started to invest responsibly to encourage companies to deliver a performance that’s both sustainable and consistent. It will lead to healthy returns that investors will enjoy over many years.
One can only expect the number of responsible investment policies to continue to increase in the coming years. That holds true not only for private equity funds but also for other investment classes. The reasons already discussed in this regard should be enough motivation for all investors to work towards a more sustainable and stable market.
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