Private equity and sustainability: taking a “big picture” approach

In the face of climate change and mounting social pressures, industries across the globe have been forced to address sustainability and inequity as a foundational part of doing business in the 21^st century. Private equity (PE) firms are no exception. As Mark Reilly, SVP and head of the financial institutions group at Ironshore, says, “Ten years ago, a PE Sponsor’s primary focus was maximizing investment returns, with very few questioning their methods or impact. Today, they are held accountable for the due diligence and acceptance of limited partners, where and with whom they invest, and how they manage that capital to realization.”

Under new pressure to make a social and environmental impact, and with much higher fiduciary standards at play, many firms are wondering how to mitigate the risks that come from higher levels of accountability. In this article, we take a look at this new landscape, and explore how a strategic insurance partner can support a PE firm’s long-term business goals.

In recent years, PE firms have faced new demands beyond maximizing returns. More and more, firms are expected to take a stance on environmental, social, and governance (ESG) policies, as well as issues around diversity and inclusion (D&I) across the industry.  

According to a recent report on private equity and ESG investing from Bain & Company, firms that ignore sustainable investing are missing out on a significant opportunity. The report noted a study where more than 60% of the 25,000 investors (ages 71 and under) surveyed said they believe “all investment funds—not just those explicitly defined as sustainable investment funds—should consider sustainability factors when making investments.”

But ESG investing doesn’t just attract more investors; the Bain report also showed that investing sustainably can lead to greater financial returns for the funds themselves. “Over the past 16 years,” the report noted, “a STOXX index of global ESG leaders has outperformed the STOXX Global 1800 Index by 37%.” Bain also cited a meta-study where “63% of the studies discovered a positive correlation between ESG investing and returns, while only 8% showed a negative effect.”

Bottom line? Focusing on ESG and DI is now clearly a widely held belief among investors across demographics – and responsible investing can bring better overall returns, as well.  

The higher expectation from both investors and employees has led to greater risk across the industry. With more claims of misrepresentation of investment strategy in light of the new focus on sustainability and inclusion, PE firms are finding it more difficult, and expensive, to protect themselves against liability claims.

Ironshore’s Mark Reilly notes these shifts in the insurance industry: “We’re currently in a hard market. It’s no surprise to anybody. It’s something we’ve been building towards for the past four or five years, and it’s driven by claims activity.”

The hard market means “a tightening of capacity in a lot of lines… whether it’s general or excess liability in the casualty space, primary commercial auto liability or in the property markets,” says Amy Gross, leader of Liberty Mutual’s Global Private Equity Practice. But while the hardening market does pose new challenges in private equity, Gross believes that risk managers have the power to help their firms stay on top.

According to Gross, one solution is taking a “big picture” approach to risk mitigation. Private equity firms that were previously hands-off when managing portfolio companies need to start taking a closer look at all their assets and assessing operating strategies to determine future risk.

“My role, and the role of the private equity practice, is to pull together the big picture for these firms, look at the aggregate of the business we do together, and help them stay on top of things because the market is certainly tough right now,” she says.

To stay head of potential liability concerns, PE firms need to partner with a dedicated and experienced insurance provider. What is the value of the right insurance partner? According to RT Thomas, vice president and underwriting manager for Ironshore’s PE Portfolio Company underwriting team, having an insurance team that is dedicated specifically to the needs of private equity portfolio companies means we can “write the business at sustainable rates… we can use our expertise to craft company-specific solutions that will help portfolio companies navigate the currently tough management liability market.”

Though the standards are higher than ever, with the right partner PE firms can not only survive but thrive – all while making an impact on long-term sustainability and inclusion efforts worldwide.

If your private equity firm is looking for an expert partner for your ongoing insurance needs, Liberty Mutual can help. Learn more about our private equity solutions.