Responsible Private Equity
Research insights and tools to maximize private equity's potential to drive better financial returns through sustainability
Private markets have a unique opportunity to create value for investors, portfolio companies and society by embedding sustainability strategies that can improve financial performance.
Private equity has a long record of bringing strategic insights and operational excellence to portfolio companies. In today’s world of material environmental and social challenges, these skills can be applied to sustainability practices that will drive operational efficiencies, innovation and growth, risk mitigation, employee engagement and productivity, supplier resiliency, and more.
CSB's research is anchored in understanding the value drivers underlying sustainability practices across industries, and we have turned that lens to private equity. First, we reviewed the academic literature about private equity’s performance in a series of impact categories and summarized our findings through the Responsible Investing Framework that defines best practice for both PE firm leadership and portfolio companies. Then, extensive interviews with GPs and LPs further informed the creation of new tools that help investors and portfolio companies identify material sustainability-related risk and opportunities, and develop strategies to create new enterprise value.
Tools for GPs and LPs to Unlock Financial Value Through Sustainability Strategies
Based on feedback and piloting with General Partners (GPs) and Limited Partners (LPs), NYU Stern CSB has developed tools to help embed sustainability strategies that drive better financial performance with PE investment processes. These tools aim to improve several gaps identified in our research, including:
- Lack of sustainability value creation expertise amongst GPs, LPs, and portfolio companies
- Primary focus is on risk, compliance and reporting, rather than value creation
- A lack of metrics and systems to assess and capture the financial benefits of sustainability strategies despite a growing desire across the ecosystem to build and track the “sustainability value creation stories” of portfolio companies
- Lack of clarity around what type of sustainability and Return on Sustainability Investment (ROSI) KPIs should be tracked, and how these can be tied to the underlying financial case of specific sustainability strategies
Tools For General Partners
Sustainability Strategy Prioritization and Value Driver Tool for Due Diligence and the Holding Period
This two-part assessment and strategy tool aims to help GPs and PE practitioners analyze portfolio company performance on material sustainability issues and provides guidance on which strategies and practices can drive financial value.
The tool is intended to be used first during the due diligence phase to gain a high-level assessment of sustainability-related risks and opportunities that can drive improved financial performance, then in the early holding period for material issue prioritization and strategy and KPI development, culminating in strategic inputs and ESG and ROSI (aligned financial metrics) KPIs that can be used to monitor and improve performance during the life of the investment.
During the due diligence stage, the objective is to provide an assessment of the current performance of the target on material sustainability issues, together with related value drivers. After selecting the sector, the model automatically populates the relevant material issues specific to the sector (using the SASB standard) as well as NYU CSB-defined strategies, practices, and value drivers. The tool then guides the assessment of the target portco across several criteria.
This assessment establishes a pulse check on the target company's performance across the spectrum of material issues and identifies red flags and upside opportunities. A heat map (Figure 1) is generated to help make a decision on whether to move ahead with an investment.
Figure 1: Due Diligence Heat Map
The second stage of the tool is designed for initial implementation during the 100 days of managing a newly acquired portfolio company. This period allows GPs to conduct in-depth research on material issues and strategies, as well as develop specific KPIs for the sustainability strategies they intend to prioritize. Conducting this analysis at the beginning of the holding period allows GPs to: 1) Identify and prioritize the sustainability strategies that will drive the most impact and financial value (see Figure 2) and 2) Begin tracking robust sustainability and related financial KPIs from the start of the holding period to establish a record of sustainability improvement throughout the investment's lifetime (see Figure 3).
Figure 2: Scatterplot Defining Sustainability Strategy Priorities Based on Material ESG Assessment
Figure 3: Database of Sustainability and Related Value Creation (ROSI) KPIs
Additional insights into using the tool can be found in an article in ImpactAlpha titled "Equipping private equity managers to unlock value through sustainability."
Following are the links to the open source GP tools. We suggest you review the deck for a quick introduction. You may wish to review the tool with the Kraft Heinz example input to see how it works in action.
- Easy to Review Deck: introducing the GP Sustainability Value Driver Tool
- GP Value Drive Excel Tool Example: filled out for Kraft Heinz to illustrate how the tool works with inputs provided
- GP Value Driver Tool with Due Diligence and Holding Period Guidance: a blank template of the two-part tool
- GP Value Driver Tool Blank Template for Due Diligence: a blank template for when PE firm wants only to use this for due diligence alone
- Extensive Database for Sustainability and ROSI KPIs: for additional resources
GP Sustainability Value Driver Tool Case Studies
Several private equity firms piloted the GP Sustainability Value Driver Tool and reported key insights from the process of
1) assessing the value creation implications of material sustainability issues;
2) defining the future upside/downside opportunities of investing in sustainability initiatives; and
3) defining sustainability and ROSI KPIs to establish value creation at exit.
BSR and Arthur D Little provided pro bono support to help the companies pilot the tool.
Click below to learn more about each case study’s process and findings.
Case Study: Kohlberg & Co, with pro bono support from BSR, used the value creation tool to help link diligence findings with post-acquisition strategy development for a portfolio company in the healthcare sector.
Diligence Assessment
Kohlberg’s diligence assessment identified performance on key material issues for the company: labor practices; business ethics; product quality & safety; employee health & safety; physical impacts of climate change; and GHG emissions, as well as the value creation/destruction possibilities
Issue Prioritization and Strategy Development
Based on the upside/downside and level of effort required to tackle the different issues, using the tool, the team prioritized mitigating climate-related downside risks impacts and capitalizing on climate-related upside opportunities.
The ROSI methodology and Kohlberg Process informed the development of the business case for formalizing ESG and climate programs. Planned implementation includes:
- annual assessment of Scopes 1, 2 and 3 emissions
- developing a decarbonization roadmap with a focus on the highest ROI initiatives
- achieving accreditation for ESG and climate-improvements
- leveraging ESG/climate program as a competitive advantage
Key Value Creation Insight: The company stands to create financial value by avoidance of regulatory non-compliance penalties, targeting customers with climate and ESG goals, and tracking savings from energy efficiencies through decarbonization.
Case Study: NB Renaissance, with pro bono support from BSR, used the value creation tool to evaluate opportunities for a recent acquisition of an Italian apparel, accessories, and footwear company.
Diligence Assessment
The diligence assessment identified labor practices; supply chain management; materials sourcing & efficiency; product quality & safety; and GhG emissions as material topics for exploration. Each issue was then scored by their current state and estimated downside and upside.
Issue Prioritization and Strategy Development
Mapping these issues, the tool identified labor practices as an area with significant opportunity for improvement, as well as high downside risk.
The firm used the ROSI methodology to monetize proposed benefits that make up a multi-year governance, training, and communications plan to address the social welfare and health and safety of employees. Implementation plans includes:
- implementing competitive salary and benefits, including health insurance support
- engaging the workforce in sustainability practices
- improving workplace health and safety culture
- promoting employee welfare and ethical behavior
- creating clear and equitable career development and promotion pathways
- target Ecovardis Silver rating in 2026
Key Value Creation Insight: The company can realize direct ROSI benefits from operational efficiency, including reducing absenteeism rate by 15% and avoiding the cost of extraordinary hours by ensuring 100% machine productivity. Further indirect monetization benefits include financing accessibility, saving €300k per year by securing ESG-linked financing, and customer retention, driving lower risk to ~€85 million of business associated with sustainability-minded customers (30% of total business).
Case Study: The Builders Fund, with pro bono support from Arthur D. Little, used the GP value creation tool to develop an actionable investment roadmap for their portfolio company, a leading provider of leased solar and energy.
Diligence Assessment
The tool helped narrow 17 relevant issues down to 6 key material issues including labor practices; waste reduction; GHG emissions; supply chain management; physical impacts of climate change; and reducing harmful chemicals and materials. Status scores were applied based on how well current practices manage for each material issue.
Issue Prioritization and Strategy Development
Top material issues of zero waste targets and supply chain management were prioritized due to high downside risk and moderate potential upside.
Builders created specific practices, KPIs, and value creation potential for related practices. Proposed implementation plans include:
- develop zero waste principles and end of life management practices
- establish baseline of Scopes 1-3 and set targets for reduction
- implement incentives for suppliers to engage in sustainable sourcing
- introduce training program for relevant employees on waste reduction
Key Value Creation Insight: By implementing a recycling program for used solar panels, the company could reduce significant waste, create a new line of business at a lower price point opening the market to new customers, and realize >$6.6M value creation opportunity in total
Case Study: A middle-market private equity firm, with pro bono support from BSR, used the value creation tool on a recent investment in the technology communications sector.
Diligence Assessment
The diligence assessment identified energy management, custom privacy, employee engagement, material sourcing & efficiency, labor practices, and competitive behavior as material topics to the company. Each issue was then scored by their current state and estimated downside and upside.
Issue Prioritization and Strategy Development
The firm identified labor practices as an area with significant upside potential, and relatedly, employee engagement as having opportunity for improvement.
The PE firm used the ROSI methodology to assess potential benefits and strategies to track and monetize programs aimed at improving employee health and safety, worker wellbeing, diversity, and equity.
Key Value Creation Insight: The company documented a 38% reduction in total recorded incident rates, significantly below industry average, achieved 95% completion rate of DEI training, and reached 50% enrollment on the internal employee engagement platform within two weeks of launch.
An Asynchronous Course for Portfolio Companies and General Partners on How to Embed Sustainability in Corporate Strategy and Unlock Financial Value
Embedding Sustainability for Improved Portfolio Company Performance
Based on our interviews and work with private equity, we find that most portfolio firms do not have sustainability expertise on staff, which limits their ability to design and execute on sustainability strategies that will unlock better financial performance. We built this free, open source asynchronous course for portfolio companies (and PE firm employees) based on our expertise in teaching practitioners. It can be executed on your own timeframe (should take a few hours to be complete and can be done in stages) and covers everything from developing ESG materiality and sustainability strategies to defining and tracking sustainability related financial returns to governance and culture topics. It includes brief quizzes to check your understanding of the concepts. Register for the class here.
Tools for Limited Partners
Sustainability/ESG Due Diligence and Monitoring Impact
According to Private Equity International’s LP Perspectives 2023 Study, “88% of LPs take evidence and consideration of ESG into account during manager due diligence” and “69% of LPs believe adopting a strong ESG policy will lead to better long-term returns in their private markets portfolio.” In a Bain report, 50% of LPs surveyed cited better investment performance as a key reason to incorporate ESG.
However, Limited Partners typically do not have much hands-on involvement in their investments and tracking the GP commitment to sustainability can be difficult. In addition, the LPS have differing sustainability objectives – a foundation endowment, for example, might be more focused on ensuring positive social impact, while a pension fund may be looking to avoid risk due to climate change or other ESG factors.
According to interviews conducted by NYU Stern CSB, many LPs report that they struggle with creating robust engagement with GPs on their ESG approach or the sustainability performance of their portfolio companies. There are two phases of engagement: the first focused on due diligence related to the PE firm itself, the second on the ESG performance of the fund/portfolio companies. The LPs use tools such as the ILPA Due Diligence Questionnaire as informed by the UN Principles for Responsible Investment DDQ, SASB standards, and side letters to track sustainability investments, but they struggle with a common approach to request and assess ESG disclosures and impacts.
Our interviews asked LPs for best practice recommendations. Some LPs have taken current frameworks, such as the ILPA UNPRI and SASB, and adapted them to build their own custom ESG DDQ for their GP selection process. Others are developing their own quantitative metrics to track and ask of their GPs and portfolio companies. In addition, some have developed their own sustainability policies that require their teams to score the GP before considering any investment.
In response to the challenges, we are developing a tool to aide LPs in making informed investment decisions without compromising returns. If you are interested in piloting the tool, please reach out to Tensie Whelan at twhelan@stern.nyu.edu
For additional resources, here please additional reporting tools used to track ESG investments.
NYU Stern would like to thank Arthur D. Little for providing a pro bono secondment to support the development of the GP tool, Investindustrial for contributing grant funds and expertise, ClimateWorks for providing a grant for the development of these tools and the U.S. Endowment for Forestry and Communities for helping to fund the first phase of research.
A Responsible Investing Framework, Insights, and Cases Toward a Positive Pathway
An analysis of the Responsible Investing Framework’s key findings and real-world applications. The whitepaper walks through each category with examples of problematic and positive PE practice, providing insights into pathways that provide positive results for shareholders, portfolio companies, and society.