Investment experience in recent years has reinforced our view that there is a compelling opportunity to embed environmental, social and governance (ESG) considerations into the private equity value creation approach. In order to harness these opportunities, there needs to be an alignment of purpose, strategy and actions at the investment team and portfolio company levels - what we describe as aligning “the heart, the head and the feet”.
The ‘heart’ is about aligning a company’s ‘noble purpose’ and culture with value creation to accelerate impact. The ‘head’ is about incorporating ESG into investment strategy, the ownership of which must sit with both the investment team and portfolio company boards. This top-down drive will help support action. Positive intent alone does not yield results. The ‘feet’ are about tangible actions, continuous improvement and progress of value creation plans that incorporate ESG objectives. To help get the feet moving, it’s important to define and measure an ESG baseline across a suite of material ESG metrics, which supports the setting of data-driven, ambitious targets, as well as a ‘closed loop’ continuous improvement approach.
ESG considerations can add a new dimension to value creation in private equity. Financial results and ESG results can be generated together, and we believe that investment returns are likely to be lower if improved ESG performance outcomes are not delivered.
We think that this opens up an exciting new horizon for private equity investors to demonstrate how to integrate ESG considerations into value creation.