Sustainability principles boost private equity returns - IFC

20 June 2011

The International Finance Corporation (IFC) has found applying sustainability criteria improves the financial returns of private equity investments.
“In our experience, it actually helps returns,” said Gavin Wilson, CEO of IFC Asset Management Company, a wholly owned subsidiary of the IFC.

Speaking at the Financial Times/IFC Sustainable Finance conference in London on 16 June, Wilson noted that this conclusion was based on a large amount of empirical data – around 2,000 investments spread over 20 years.

Furthermore, he added, as the IFC strengthened its sustainability criteria over the past decade, the financial performance of investee companies had improved. “Our returns have got better and outperformance with respect to the benchmark has got better,” he said.

“Sustainability is not just a ‘nice-to-have’ but a ‘must-have’,” he concluded.

Both private equity and sustainability concerns are becoming more mainstream in the financial markets, and the former can have a ‘catalytic’ effect on the latter, Wilson suggested. Private equity investors typically undertake more thorough research and have a better understanding of the companies they invest in than investors who only buy shares in listed companies.

Private equity investors generally remain much more closely involved in investee companies and are therefore well placed to influence their behaviour and performance, including on environmental, social and governance (ESG) issues. Sometimes, he said, private equity investors are even brought into a company specifically to help with ESG issues. When things go wrong with equity investments, it is commonly as a result of ESG failings, he added.

And it is not just the $4 billion IFC Asset Management Company that believes in the beneficial effect of sustainability screening on private equity returns, he noted, pointing to the success of Kohlberg Kravis Roberts’ Green Portfolio programme and Carlyle Group’s EcoValuScreen

Graham Cooper