Perceived Factors of Importance influencing Environmental, Social and Governance (ESG) Performance Indicators in Private Equity, South Africa

Abstract

Background: Private equity investment managers rely on Environmental, Social and Governance (ESG) risk and performance indicators to understand and measure ESG impacts in order to make decisions that will improve the positive ESG impacts and minimize the negative ESG impacts of their investments. Private equity investment managers assess for ESG risks and impact in order to safeguard the assets that they invest in on behalf of their investors. However, currently applied ESG risk and performance indicators do not divulge the true reflection of material issues associated with investments and these indicators do not encompass the main criteria/factors that investment managers should thoroughly understand regarding a firm’s ethical impact and sustainable practices. Objectives: The purpose of this research study is to understand the perceived factors of importance influencing ESG risk and performance indicators used by private equity investment managers during the investment screening and due diligence phases for investment decision making purposes. Subsequently, assist investment managers to consider ESG risk and performance indicators that divulge the true reflection of material ESG impacts associated with the potential investment company during the investment screening and due diligence phases to avoid reputational and financial risks that ultimately reduce investor confidence in private equity firms. Methods: The research methodologies included research paradigm, research propositions, reliability and validity of instruments and the study, data collection, research participants, participants description and data analysis. Thematic analysis was used to identify, analyse and interpret themes from the collected qualitative data. Results: The results indicated that perceived factors of importance influencing ESG performance indicators in Private Equity during investment screening are predominantly focused on sound corporate governance practices because business ethics enable participants to assess the potential investment for compatibility to the investment mandate and exclusion list. Such understanding enables the participants to avoid investing in activities which contravene the mandate and ethical approach of the investment mandate and exclusion list. The findings highlight that the perceived factors of importance influencing ESG performance indicators in Private Equity during investment due diligence are predominantly focused on environmental and social factors because according to the 5 participants, understanding labour and working conditions, environmental commitment and communities investing determines the investment company’s social image and ultimately its reputational and financial risks. The overall results indicated that pre-investment, most participants want to mainly understand the ESG aspect associated with Corporate Governance, Labour and Working Conditions, Environmental Commitment and Communities Investing. The perceived factors of importance influencing ESG risk and performance indicators that the participants want to understand pre-investment are triggered by Political, Economic, Societal, Global, Environmental and Legislative issues (PESGEL) and internal Strengths, Weaknesses, Opportunities and Threats issues (SWOT) considerations. Conclusion: The perceived factors of importance frameworks derived from this study provide a holistic framework, which investment managers can adopt to inform decision making during investment screening and due diligence. The ESG perceived factors of importance identified in this study may be useful to private equity investment managers in order to divulge the true reflection of material ESG impacts associated with the potential investment. Therefore, it can be concluded that this proves the research proposition, P1, that perceived factors of importance influencing ESG risk and performance indicators that are predefined are likely to be more effective for decision-making purposes than perceived factors of importance influencing ESG risk and performance indicators that are not predefined.