Ben Morley (left) and Vinay Shandal (right), Boston Consulting Group
Ben Morley (left) and Vinay Shandal (right), Boston Consulting Group

As members of the BCG team supporting the EDCI, we had a unique opportunity over the last six months to sit down, often in person, with leaders at more than 50 PE funds – funds that vary significantly in size, geographic focus and investment strategy. In these conversations, we talked through the insights and learnings from comparing (in many cases for the very first time) their portfolio companies’ performance on ESG metrics relative to their private markets peers.

While these conversations were as diverse as the funds themselves, three consistent themes emerged, offering a perspective on how the industry will be approaching sustainability in 2024.

Harnessing directional insights to guide prioritisation.

This year’s EDCI benchmark includes data from almost 4,300 privately owned portfolio companies. As such, the granularity of comparisons has improved significantly, as a larger dataset enables more tailored, like-for-like peer sets for any given company. While business model idiosyncrasies can sometimes explain deviations from a peer set, we found that sustainability leaders are appropriately using the directional insights unlocked by the benchmark to guide prioritisation, and provide indicative answers to strategic questions.

Questions like, for which metrics should the fund celebrate progress to date? For which metrics should they double down on driving improvement in 2024? Which portfolio companies are likely to have the greatest opportunities for sustainability-related value creation?

For example, firms are now able to compare emissions intensity across their portfolio companies relative to peers in their specific industries. So where previously two such companies with similar emissions intensity levels may have been treated with the same attention, leading funds are now prioritising their engagement with the one that is operating at higher emissions levels relative to their industry peers, where there are more likely to be value-accretive abatement levers that can be pulled.

The power of competition to inspire action

The power of peer benchmarking is undeniable. For the first time, rather than relying on public market proxies, PE firms have visibility into how their portfolio companies stack up relative to their private peers across a range of performance-based ESG metrics. We heard time and again how rewarding it is for deal professionals and management teams to be able to measure and showcase with their portfolio companies the tangible progress they have unlocked through their sustainability initiatives. On the flip side, those that are currently lagging behind their peers are feeling increasingly motivated to redouble their efforts in driving quantifiable improvements.

Moving from measurement to management – starting today

Importantly, the discussions we had were not just theoretical or abstract – they invariably resulted in tangible next steps for the funds. While just a year or two ago, the dominant conversation was around how to collect private market ESG data, the EDCI has helped shift the focus of many of today’s conversations to using the data to drive sustainability outcomes.

On climate, we heard from funds planning to develop decarbonisation playbooks and systematically increase renewable energy usage across their portfolio while significantly reducing their operating costs. On the social side, private equity leaders are rethinking their approach to employee value propositions with a view toward improving job quality and employee productivity while reducing turnover. And as the EDCI continues to grow and generate comparable longitudinal data over time, funds will be able to track their rate of progress relative to the benchmark and understand how that progress is driving commercial outcomes.

It’s a privilege to have had the opportunity to be in conversation with leaders across the private equity industry on sustainability topics. Through these conversations we’ve clearly heard the tangible ways in which the EDCI analysis is helping funds uncover new insights about their portfolios – and equipping them with practical next steps as they look to build thriving businesses that deliver outcomes for their shareholders and stakeholders alike.

The authors of this article are Vinay Shandal and Ben Morley, partners at Boston Consulting Group. They would like to thank Meggan Davis, Thais Esteves and Patrick Pierson for their contributions.