Asian Private Equity Firms Grapple with Tougher ESG Demands

MoFo partner and global co-chair of the firm’s Private Equity Practice Marcia Ellis was quoted in a recent article, “Asian private equity firms grapple with tougher ESG demands,” published by AsianInvestor. This article discusses what private equity firms and their portfolio companies should do to grapple with the imminent ramp-up in ESG regulatory requirements and pressures from LPs.

According to Marcia, “private equity firms and portfolio companies should prepare for an ‘onslaught’ of regulation associated with the overseas customers of portfolio companies in the coming years.” An increased regulatory pressure to comply with ESG standards has coincided with ramped-up ESG demands from investors. Asia-based portfolio companies of PE firms that directly or indirectly provide products or components to European Union and United States companies will be put under mounting pressure to reduce their own emissions or risk losing significant amounts of business, as their client companies are subject to regulations that require them to report on the carbon emissions of each of their vendors and suppliers, and even the suppliers of their suppliers.

The ESG demands extend not only to carbon emissions, but also to other issues, notably the treatment of workers. “In Asia, many portfolio companies are in the value chain of EU companies covered by the Corporate Sustainability Reporting Directive (CSRD), and thus will be required to produce transparent reports on both carbon emissions and their more human rights-related issues,” she said. With so many ESG issues around, the key is to focus on materiality assessments, looking at the areas PE funds invest in, at what’s most impactful for the areas in which they invest.

Marcia also pointed out that an existing issue is the lack of common standards regarding what ESG should entail. However, she expressed optimism as the International Sustainability Standards Board (ISSB) has given standards for disclosure. She suggested that “PE firms should to a large extent be focusing on those, because what[regulators] in Hong Kong and Singapore are heading towards is likely to be close to ISSB standards.” “Once we have standards in place, then at least we’re all talking about the same thing and collecting data in the same way,” she added.

With the wide spectrum of ESG issues, Marcia suggested PE funds to look from an economic standpoint and focus on the targets that are most impactful and help increase the valuation of the portfolio company first. “The role that PE funds can play is in working with their portfolio companies to help put them in a place where economically they'll be better off because they’ll be chosen as the vendor or the service provider thanks to having lower emissions,” she said.

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