Next month, Mergers & Acquisitions will unveil a new honors program, PE Innovators in ESG. The list, which joins our other honors programs, such as The Most Influential Women in Mid-Market M&A, will recognize private equity firms and other PE-related organizations that are advanced in integrating ESG into their investment strategies – or are leading the industry as a whole on environment, social and governance issues. We were encouraged by a recent survey that shows ESG awareness is growing in middle-market PE firms, although they still lag bigger firms.

The survey, conducted by RSM US LLP, a tax, audit and consulting firm focused on the middle market, showed 69 percent of the 413 executives polled in July were familiar with ESG criteria, up from 39 percent in the fourth quarter of 2019. But bigger companies were more advanced. Nearly three-quarters of companies in the $50 million to $1 billion revenue range had formal ESG plans in place, compared with half the companies in the $10 million to $50 million range.

Middle-market PE firms have started to focus more on ESG issues over the last six to 12 months, both in their portfolio companies and in potential acquisitions, Anthony DeCandido, RSM partner and financial services senior analyst, told Mergers & Acquisitions. This seems to be a trickle-down effect from larger firms focusing on ESG, such as Blackstone, Carlyle and KKR, he said.

Middle-market companies are turning to ESG initiatives mainly for non-financial reasons, the survey shows. Most middle-market executives probably don’t yet fully understand how improved ESG performance translates to improved financial performance, DeCandido said. “There’s still a fair level of education required to connect those dots.”

Most middle-market companies that factor ESG into their businesses do so in an unstructured way, said Justin Kulla, head of ESG for TZP Group, a lower-middle-market PE firm in New York. Still, when a company focuses on ESG, that’s a sign that the company treats its stakeholders well–including employees, customers, communities and investors—and a sign of good business practices, which indirectly boosts the company’s value. Said Kulla: “Valuations are high in the market across the board, but there is a premium on companies that have good business practices.”

Join us on Dec. 1 for PE Innovators in ESG Speak, our virtual event.

Keith Button