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Business News/ Companies / News/  Sustainability has become value driver for PE cos: BCG

MUMBAI : Private equity firms now view climate and sustainability as value drivers rather than just compliance and reporting requirements, senior partners at consulting firm BCG said.

“Climate and sustainability is a major trend in the private equity industry. Previously it was more about compliance and reporting, but now we are seeing that the conversation has moved to ‘how can we make climate and sustainability a value creation lever for our portfolio company?’ And today, the LPs are increasingly demanding this front. In this context, we see at GPs a level of discussion that was not existing even two or three years ago," said Benjamin Entraygues, managing director and senior partner; global leader, principal investors and private equity practice, BCG.

He added that an increasing number of discussions are happening around energy transition and climate and sustainability, whether it’s about grey-to-green transition or sustainability as an advantage.

“Let’s just take a simple example: if you are a B2B supplier of a large corporation, and if you manage to transform your operations and reduce your CO2 emissions, then you are a powerful lever for your large corporate clients to manage some of their pain points and reduce its scope three carbon emissions. By doing so, you add value to your customer. And by adding value, you can increase your share of business with the client, and you can also translate that into an economic equation because, at some point, there is a value for that. So you can create value through transition," he said.

Entraygues believes that private capital will be a powerhouse in the transition to net zero and will positively impact climate.

Even India-based private equity funds are increasingly focusing on climate and sustainability.

“In India, I would say that the emphasis on “green" in dealmaking is certainly taking off, but it’s not at the inflection point yet. If I take energy as an example, in the last 18-24 months, easily 40- 50% of deals would be having a component of the transition to clean or renewables," said Kanchan Samtani, managing director and senior partner, BCG.

“The deals that are taking place today, the question is getting asked about whether this has a net positive impact or not. I would not say that dealmakers are not yet actively scouting specifically for green deals; however, as Benjamin mentioned, we expect grey-to-green transitioning and sustainability to become more and more relevant in India and Asia as well. Private capital has the potential for creating a significant impact on ESG initiatives in India," she added.

Speaking about the current global macro-environment with rising interest rates, high inflation and geopolitical conflict, which has led to lower deal volumes, the BCG senior partners pointed out that while most geographies have been impacted, pockets in Asia, such as India, have shown resilience.

“In Asia, it’s quite disaggregated. China, of course, has been the most impacted. Other geographies like India and SEA have been impacted in pockets. Some of the large LPs are going into a wait-and-watch mode; however, high conviction deals are continuing to get done," Samtani said.

Entraygues added that even as dealmaking faces several headwinds, the amount of dry powder available to invest remains high, and Asia, in particular, has seen a sharp growth in capital availability.

“Assets under management in private equity have grown consistently above 10% per year over the past decade. So we see a huge amount of capital deployed in this space. And if you look at the dry powder, it’s in the same range. It has never been so high. And if we look at Asia, specifically, it has grown by 20% per annum over the past years," he said.

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Swaraj Singh Dhanjal
" Based in Mumbai, Swaraj Singh Dhanjal is responsible for Mint’s corporate news coverage. For the past eight years he has been writing on the biggest deals in private equity, venture capital, IPO market and corporate mergers and acquisitions. An engineer and an MBA, he started his journalism career in 2014 with Mint. "
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Updated: 10 Jan 2023, 06:20 AM IST
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