Full Scope Insights spent two days at PEI Responsible Investment Forum: New York. I didn’t know what to expect, considering all the doom and gloom surrounding ESG these days. What I experienced was far from what the media would lead you to believe. Almost every major Private Equity shop, and trillions of AUM were in attendance. They talked about the ESG challenges they face, but most were focused on the value creation opportunities that can be unlocked through active ownership and sustainable business practices. Here’s what I heard:
1- Two geographic markets, two different conversations
As one GP noted, in the US conversations with LP’s and portfolio companies are very focused on DEI (both positively and negatively) whereas the conversations in Europe are focused on climate and regulations (with favorable political sentiment for both).
2- Strategic integration matters
B2B companies that integrate commercial sustainability strategies on average net higher than expected returns and companies that take a more compliance-oriented approach netted expected returns. Conversely, those that did nothing on the sustainability side, suffered upon exit. However, one GP cautioned that companies must focus on financial health before ESG value creation. Timing is everything when it comes to approaching management teams about ESG and sustainability related value creation opportunities.
3- Know your audience
In certain situations, terms like responsible business/sustainability instead of ESG open doors, especially when linked to value creation opportunities. Every company cares about operational efficiency, new market channels and treating their employees well. You can talk ESG without ever mentioning ESG.
4- Accountability is key
Sustainability-related KPI’s that are material to a company’s financial performance drive sustainable business practices. Linking these KPI’s to compensation focuses management teams on the issues that will increase returns. Value is created when linked to performance.
5- Data drives insight, insight drives value
Data for the sake of data is an effort in futility. If you don’t use that data for insight, you won’t unlock the full value creation opportunities of your investments. Additionally, fund managers are moving away from proxy’s & estimates and towards real company data (especially for GHG emissions) in anticipation of assurance.
-Lee Ballin, Partner & Head of ESG Advisory