Can private equity be a driver of positive change for the environment, social justice and healthy institutions?
Civic Consulting USA says “Yes!”
In the investment community, environmental and social impact considerations are often abbreviated as “ESG,” which is short for “Environmental, Social, and Governance” factors.
There’s an increasing body of practice and research demonstrating that social impact considerations can drive bottom line returns for large, publicly-traded companies.
In fact, it is now common for pension funds and institutional investors to say that ESG considerations are important for long-term returns in the public markets. As Swiss Re Chief Investment Officer Guido Fuerer said, “Equities and fixed income products from companies and sectors with high ESG ratings have better risk-return ratios.”
However, in contrast to pension funds and endowments, which think decades ahead, private equity firms typically seek to deliver transformational value from the companies they control within just a few years. To date, the shorter-term focus of private equity firms has precluded most ESG or social impact considerations, particularly in the lower and middle market.
Until recently, only the largest publicly-traded private equity firms, such as Blackstone, KKR, or Carlyle, have had access to the financial and social benefits of ESG analysis. Due to their scale and public reporting requirements, such firms have dedicated teams to ESG due diligence and ESG board oversight. For these firms, it began as a risk-management function and good corporate housekeeping. However, it turned into a major source of value creation at their portfolio companies.
Strong ESG programs are driving customer satisfaction, brand equity, operational efficiencies, and happier, more productive employees – with combined EBITDA benefit in the tens of millions. These large firms have also taken millions of metric tonnes of carbon from the air and saved billions of gallons of water.
We believe these “double bottom line” benefits can spread to the middle market.
“We’re now seeing quantifiable examples of ESG initiatives delivering significant EBITDA value,” says ESG Portfolio Partners Principal Ted Knudsen. “Waste diversion, supply chain resilience, employee engagement, and productivity – these are all ways that the large cap PE firms are turning ESG into value for their LPs.”
Why is this important to the rest of us?
For one, US ranked 42 out of 45 OECD countries on the UN’s assessment of sustainable development. That means Americans live with greater inequality and pollution than our peers around the world.
Secondly, the companies owned by private equity grew jobs nearly three times as fast as other companies. In fact, these companies represent the second largest source of private-sector employment in the country. Changing the mindset of private equity investors has tremendous potential to affect millions of Americans in every city and community.
Third, private equity firms typically hold onto their investments for less than six years. New paradigms can take root quickly and yield benefits for American families before kids currently in middle school graduate from high school.
“If private equity firms in America take up ESG as global counterparts have, it will drive far larger and faster improvement in energy efficiency, gender equity, and fair wages than any current government regulatory effort,” says Alexander Shermansong, CEO of Civic Consulting USA. “PE firms have the money and the control over company boards to make world-changing progress on these collective impact issues in just three to seven years.”
Civic Consulting USA is committed to original research, developing toolkits and best practices, and providing custom-tailored guidance for private equity leaders. Our data-based approach will help the industry better quantify their positive societal impact for reporting to all stakeholders: investors, governments and the general public.