Private Equity

People, Planet, Profit: Changing the way portfolio company boards operate in a socially conscious and sustainable world

 



Today’s portfolio company boards are increasingly focused on helping their businesses adapt for a new era of profitability in a socially and environmentally conscious world.  Success means integrating sustainability-driven strategies to improve operational efficiency, corporate responsibility and long-term financial outperformance.

There is clear evidence that integrating ESG metrics and practices as a fundamental pillar of corporate strategy is an important step towards creating a strong global economy that commits to the “three P’s”—people, planet and profit.

Committing to ESG is not just the right thing to do; it is good for business. Sustainability is a critical lever for value creation. It influences business strategy throughout the transaction lifecycle and across portfolios, ultimately delivering better investments at exit.

  • According to BCG, organizations that perform strongest in specific ESG areas have margins that are up to 12% higher than median performers in these areas.
  • A study by BDO LLP showed 63% of UK private equity firms now consider ESG principles when making investments.
  • A McKinsey Global Survey found C-suite executives and investment professionals are prepared to pay an average 10% more for a company with a favorable ESG record compared to one with a negative record.
  • According to a recent MCSI 2021 Global Institutional Investor survey, 79% of investors in Asia-Pacific increased ESG investments ‘significantly’ or ‘moderately’ in response to COVID-19.

Pressure from LPs is also driving deeper commitments to ESG. “LPs are increasingly focused on non-financial performance metrics such as those on ESG and diversity,” said Rita-Anne O’Neill, a partner and co-head of the global private equity group at Sullivan & Cromwell LLP, in a recent Financier Worldwide article. “LPs want details beyond polices and initiatives. They want to see actual ESG performance at portfolio companies, and diversity at the investment professional and portfolio board level.”

ESG Value Creation Starts at the Top

Embracing ESG is not simply a case of creating a comprehensive set of metrics, it is a way of doing business. It takes concerted effort and committed leadership to ensure that this approach resounds throughout the organization, with support at every level.

At the board level, directors must play a critical role in steering efforts and people in the right direction. Success for ESG lies within the trifecta of strong leadership at the top, commitment across the team and a strong framework and reporting capability throughout the company.

What should portfolio boards look for when assessing leaders?

In sourcing talent, C-suite leaders and board directors need to identify executives with the right skillsets to thrive in today’s evolving landscape: a balance of strong business acumen a focus and passion for environmental and social issues.

Our research shows that there is a set of differentiating leadership attributes that fuel sustainable leaders’ success: They combine a sustainable mindset with four critical capabilities: 

  • Multi-level systems thinking—The ability to incorporate the interplay of business, societal and environmental systems and drive decisions that turn sustainability into a competitive advantage. 
  • Stakeholder influence—They do not seek to manage stakeholders, rather they actively include them in defining and actioning decisions. 
  • Disruptive innovation—They possess the courage to challenge traditional approaches and cut through bureaucracy to drive the disruptive innovation needed to do away with the profitability- sustainability trade-off. 
  • Long-term activation—They do not simply have an orientation towards the long term, they set bold sustainability goals and rigorously drive concerted action in their pursuit.Strong leadership is an imperative to a more sustainable world

ESG is a value driver that will continue to grow in importance. Firms that put it at the heart of their business strategies will be the market leaders in driving the new sustainable economy. The path forward is through strong leadership that understands the critical intersection of doing good for our planet and people while also driving strong returns.

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People, Planet, Profit: Changing the way portfolio company boards operate in a socially conscious and sustainable world