— By Amy Newlan, SVP, Head of Client Development
It was back in August 2019, which seems like a lifetime ago, when a movement resurged to compel global organizations to deliver more than just financial returns for investors. During that summer, 181 CEO members of the Business Roundtable professed a commitment to invest in and develop corporate governance initiatives with a focus on a broader range of societal stakeholders, not just shareholders. The movement drew strength from leaders and evangelists in the global business community, like Blackrock’s Larry Fink and Salesforce’s Marc Benioff.
It’s important to note that momentum for this effort, more commonly known as “stakeholder capitalism,” began to swell before COVID or the social and racial unrest of this past summer.
Since then, we have been confronted with a global pandemic, raging wildfires, devastating hurricanes, and painful reminders of social injustice and racial inequality. The soaring rise of the financial markets and resulting windfalls for billionaires juxtaposed against the toll the pandemic has taken on low-income communities has only further exposed and widened the chasm between the haves and have-nots.
As a result, the importance of ESG (Environmental, Social & Governance) and DEI (Diversity, Equity & Inclusion) is rising across the investing ecosystem. Any investment-seeking organization unsure about this can consult the results of a recent study of 600 global institutional investors who stated unequivocally that their investment teams will “apply a premium valuation to companies that excel in environmental, social impact and governance initiatives.” In a November 2020 ESG sentiment study, US and UK LPs ranked ESG 7.5 out of 10 in importance when making an investment decision. And, according to Ernst & Young’s 2020 Global Alternative Fund survey, nearly all investors (88%) are asking managers how ESG is incorporated into their investment decision-making.
Private Equity’s Unique Challenge
Private equity firms will find themselves in an interesting spot.
You will be doubly challenged with introducing and advancing ESG and DEI practices within your own organization while also conveying the importance of enacting similar initiatives within your portfolio companies where, due to the rise of operating partners, you have more influence in day-to-day operations than ever before. Convincing portfolio company management might not always be easy.
Like all organizations, your firm will be further tasked with demonstrating the impact of your efforts and showcasing real-world outcomes for discerning LPs who, like the survey respondents, are sure to be more scrutinous, taking ESG and DEI into greater account when evaluating your firm for investment considerations.
Measuring impact will pose a host of new challenges for sponsors, like yourself.
Whereas you currently have any number of practices for tracking and measuring quantitative, tangible shareholder value creation efforts, the metrics you will need for measuring stakeholder initiatives tend to be more ambiguous in nature and often cannot be done with a spreadsheet.
Measuring shareholder returns typically involves the CFO’s office, but truly holistic measurement will require input from a broader range of executives and partners.
Measuring ESG and DEI Impact
Determining how the impact of stakeholder initiatives will be measured should be a critical exercise undertaken as you develop the initiatives themselves. In doing so, ask yourself the following questions:
- Have we decided who is accountable for our ESG and DEI initiatives?
- Have we included ESG and DEI in our portfolio company onboarding processes?
- In building my ESG and DEI initiatives, have we established the unique metrics against which we will be able to analyze and measure the impact of each initiative?
- Have we decided how to digest the information and distill it into meaningful insights for board members and limited partners?
- Are we involving all the executives and company officers who have the insights that will be needed?
- Do we have the technological capabilities to effectively collect, track and analyze this data?
- Have we incorporated stakeholder-related goals into the broader investment thesis and ensured that our operating partners understand the objectives?
- Do we need dedicated human capital resources – a Chief Stakeholder Officer, perhaps – to design and launch initiatives, measure progress and ensure that results are visible and known to partners and investors?
- How are we going to strike a balance when the pursuit of ESG or DEI initiatives clashes with the profitability goals of the business plan?
Measure and Showcase Your Impact with Maestro
Maestro is a collaboration platform built specifically to help PE teams manage portfolio operations and ultimately accelerate value creation. In the same way that Maestro is used by sponsors to track and measure the impact of value creation initiatives at their portfolio companies, the platform is also suited to support sponsors seeking to develop and understand the impact of ESG and DEI efforts. Maestro serves as a single source of data and insights, providing sponsors with real-time visibility into both shareholder and stakeholder activities.
As your PE firm launches new ESG and DEI initiatives, or expands existing ones, let’s start a conversation about how Maestro can help to capture the impact of your efforts and investments.