Environmental, Social & Governance (ESG)

Sustainability in the PE sector

In the world of investment we often talked about 'ESG' instead of 'sustainability'. This abbreviation stands for Environmental, Social & Governance. It means that factors such as energy, climate, availability of raw materials, health, safety and good corporate governance are taken into account in the selection and management of holdings in companies.

Where companies in this area have correct capacity, private equity ideally suited to exploit these opportunities while making a positive contribution to society, not only profit, but also to people and planet. The entire investment process - from selection to exit - provides opportunities for sustainability.

ESG stands for finding a balance between financial returns, transparency, social interests and the environment without losing the balance there between. Contrary to popular belief, it appears that this balance leads to better results for both the company and society. There is a broad consensus that ESG objectives ultimately create value for portfolio companies, both from a risk and value creation.

Private Equity and CSRD

In order to comply with the Corporate Sustainability Reporting Directive (CSRD) of the EU, many private equity firms and portfolio companies will need to report extensively on their sustainability performance.

The EU's CSRD is the most comprehensive sustainability reporting obligation that private equity firms and their portfolio companies in the Netherlands have faced so far. The directive, which came into effect in January 2023, requires PE firms and other companies to provide detailed information on a wide range of environmental, social, and governance topics related to their European activities. It is also specified that the provided information will ultimately be subject to external assurance.

Meeting these requirements poses a significant challenge. Few companies have already implemented the necessary systems and processes. Much of the required information is not readily available to them. Furthermore, the regulatory landscape in the Netherlands is evolving rapidly. Dutch legislation still needs to incorporate the CSRD into local law before July 2024. As it is likely that additional requirements will be added on top of the CSRD requirements themselves, companies in the Netherlands with entities in multiple EU jurisdictions can expect an increased level of complexity. Companies must also monitor the new reporting requirements outside the EU, such as the recently approved rules by the U.S. Securities and Exchange Commission (SEC) regarding climate-related reporting for listed companies.

Furthermore, the deadline for CSRD compliance is approaching rapidly. Companies in the Netherlands currently providing information under the EU's Non-Financial Reporting Directive (NFRD) are expected to report for the first time according to the CSRD in 2025, covering their 2024 data. Companies in the Netherlands that meet certain size criteria are required to report on their 2025 data in 2026.