What PE can do today to meet tomorrow’s ESG demands

A company’s primary purpose is no longer simply enhancing and protecting value for shareholders through short-term profits, it is also delivering long-term value (LTV) to all stakeholders. Private equity (PE) has taken a keen interest in this expanded definition of value in the face of investor, employee and societal interest in conscious capitalism and ESG. The outdated “do no harm” mantra is rapidly being replaced with a business imperative to “do good.”

In this shift from shareholder to stakeholder capitalism, the biggest challenge is moving beyond public relations talking points and truly integrating ESG into an organization. Organizations that anchor themselves to a meaningful purpose are better positioned to benefit from, demonstrate and measure the value they create and reap both financial and non-financial rewards.

For PE, developing and executing against a compelling purpose-driven, stakeholder-focused strategy incorporates employee experience, customer value proposition, supply chain management, capital allocation decisions and leadership incentives.

ESG skeptics need only look at the facts to be convinced to act:

• One in four investment dollars is now flowing into ESG funds: not only is that number growing exponentially, there is competition for those investment dollars.
• There is a massive transfer of wealth occurring from boomers to millennials, who have very different values and expectations. 
• There is frequently a lower cost of capital for companies with better ESG scores.
• During the initial market selloff after the COVID-19 pandemic, funds that had an ESG focus experienced lower volatility and faster recovery than non-ESG funds.
  

PE firms starting their ESG journey can use the following framework:

• Now – understand the core ESG issues that are important to your firm and your key stakeholders. 
• Next – report transparently on ESG issues, metrics, goals, and management tactics. 
• Beyond – leverage what you learned and gained by integrating ESG into your business and articulating how it creates LTV for you and your stakeholders.

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