Environmental, Social and Governance (ESG) strategies have catapulted to the top of private equity’s focus, largely because institutional investors are increasingly clamoring for them when considering an allocation to their funds. As the industry shifts to adapt their operations to one that is ESG conscious, firms need to act with intent, create impact, and work together with their portfolio companies to help everyone progress.
These were some of the key take-aways at Mergers & Acquisitions’ recent PE Innovators in ESG MEET conference in New York City.
Acting with Intent
Creating real, actionable change to the way a firm does business is easier said than done, said Sarah Tomolonius, VP of investor relations at M13, a venture capital firm based in Santa Monica, Calif. When beginning to create the steps to incorporate the value of ESG principles in your firm the first step might seem like a simple one but is critical to ESG development.
“The one thing you need to when you are thinking about building a policy is do what you say you are going to do,” Tomolonius said. “At the very minimum you have to do that.”
Once you begin taking the steps to implement ESG into your firm it is then critical to act with intent, she told the audience. The true point of ESG initiatives doesn’t lie in a firm’s broadcasting of its ESG changes they make for good PR, but the value that these changes add to a firm.
“Try not to make it a ‘check the box’ exercise and completion scorecard,” said Melissa Mounce, GTCR’s managing director of leadership talent & diversity. “But instead, focus on what is meaningful to your business and how is that going to drive value for the investment.”
A firm beginning to create their ESG roadmaps cannot accomplish everything at once. From large firms with an entire committee dedicated to ESG, to small firms that may only have one person in charge of creating such important change; it is important to look inwards and understand what is achievable today and what is more of a future aspiration.
Emily Henry, head of investor relations with Baypine, a private equity firm founded in 2020, said, “as a small firm, I think it is important to be aware of what you can do and what you can’t do and what should be a day one activity and what should be more aspirational. I think the acknowledgment of that has helped us be really successful in the first 24 months of our firm’s life.”
Scott Chung, a vice president at Tikehau Capital, shared how to take the first steps to create impact using as an example of one of his own company’s investments.
“Net zero by 2050 is great, but let’s peel that back and examine where to start. What can we do now that has the most impact for the dollar invested and how can we enact change?” Chung said.
Chung used one of his firm’s European portfolio companies, Euro Group Laminations, which makes motors and rotors that go into electric motors, as an example.
“When we invested in the company, they were just doing consumer appliances. What we have done is taken that company and pivoted with the help of our auto-experienced operating partners to shift into a tier one auto supplier,” Chung said. “Now if you buy an electric vehicle there is a good chance you are buying a Euro Group motor. So that is our impact.”
Using Data Together
Private Equity firms trying to create impact, value and a new investment thesis cannot do it on their own. It is crucial to create and make use of reporting frameworks and outside consultants so that firms within your portfolio can see and learn from what others are doing and asking for.
Tulsi Byrne, recently hired as the head of ESG, Francisco Partners explains how her firm works to exchange information across the portfolio to create an organizational support system behind their ESG approach, “We have an ESG Committee that helps to oversee ESG across the firm and portfolio to ensure a consistent and systematic approach. In my new role, I am developing a list of best practices, consultants and other resources to support our portfolio companies in their ESG journey. We also have an operating arm, Francisco Partners Consulting, that has a human capital management team and data security experts that are working day in and day out to support our companies in these areas.”
Jeffrey Warshauer, head of ESG at New Jersey’s Division of Investment, echoed Byrne’s ‘teamwork’ philosophy. Firms must understand the importance of working together to educate across their portfolios – and their investors, Warshauer said. Many limited partners may not understand what ESG even stands for. As a result, it is crucial to make use of education and reporting conventions so that firms can get a baseline understanding and develop footing to grow.
“We are highly supportive of leveraging standardized reporting conventions and frameworks,” Warshauer said. “Anything that can help drive reliable, comparable and actionable data to make better-informed investment decisions are great. A lot of the frameworks we have developed internally leverage standardized reporting.”
Data reporting frameworks and conventions have become a crucial part of how firms are learning how to make the most of the ESG impact, according to Matt Schey, senior director at the Institutional Limited Partners Association, or ILPA. Materiality assessments are a helpful tool in understanding the logistics behind ESG policies and in being able to understand how ESG issues will affect the stakeholders in a firm, is truly a centerpiece to establishing a strategy, he said.
“Five years ago, there were far fewer organizations, including both LPs and GPs, who had ESG policies on paper and well-integrated processes in place,” Schey said. “What was typically reported were anecdotes, case studies, and a lot of qualitative information. Many of the KPIs out there were more binary: yes or no. Today there is a greater focus on the numbers behind this and more structure and attention behind materiality, going sector by sector.”
The benefits of such large change to a firm’s operations and investment thesis can be hard to materialize or understand at first, said Mackenzie Turner, director of policy and impact at The Vistria Group. It is a daunting task to reorient the way a firm does business around ideas like environment, social and governance strategies, she said. However, the value added across the portfolio and business through these initiatives builds a stronger and more valuable firm ready for the future.
“The ultimate goal here is to create better companies,” Turner said. “We believe that by improving ESG and impact, that is contributing to the financial value overall.” M&A