Five ways to master ESG in a new private equity landscape

Participants at PEI's Responsible Investment Forum in New York discussed how to build a sustainable, ESG-minded investment portfolio. Here are the top themes.

The Private Equity International Responsible Investment Forum in New York unveiled the dynamic interplay of environmental, social and governance factors transforming private market investing.

By disentangling ESG from impact, embracing imperfect data and painting a holistic picture of decarbonization, speakers and attendees were generally in agreement that investors and their service providers can harmonize their strategies to create a sustainable and resonant investment portfolio for the evolving demands of our time.

Of the many insights that were shared at the forum, here are the five most commonly discussed themes at the event in March.

1 Getting ESG buy-in is ‘all in the framing’

Even in the face of backlash against ESG programs, speakers at the forum widely agreed that ESG risks are not going away. ESG professionals in attendance urged investors to adopt a proactive approach to integrating ESG factors into their investment processes to stay ahead of the curve. And several firms present at the forum detailed the ways they are building ESG priorities into their operating frameworks.

One ESG head said that their firm has adopted a financial approach to ensuring ESG goals are met, tying 25 percent of short-term bonuses to whether or not ESG goals have been met.

A point raised by a few voices at the forum was that ESG should be viewed as an investment rather than a cost. A strong ESG performance can win or lose a portfolio company business, highlighting the potential financial implications of ESG integration, one panelist said.

2 Communication is key

Front of mind for many in the ESG space is the pressing need for investors to clarify the distinctions between ESG and impact, while acknowledging their interconnections. Generally, ESG concentrates on mitigating risks and capitalizing on opportunities, whereas impact investing is devoted to generating quantifiable, positive societal or environmental transformations. To effectively convey the significance of both ESG and impact, speakers said that private markets must master the art of communication, crafting clear and compelling narratives around their strategies and accomplishments.

This demands a sophisticated approach: celebrating successes without inflating their influence. With a strong foundation and strong messaging, investors can cultivate a more nuanced understanding and drive the responsible investing movement with confidence and clarity.

Positive goals: panelists said a transparent approach and sharing best practices were important going forward

3 Embrace imperfect data

Collecting and analyzing comprehensive ESG data is challenging, but speakers suggested that it should not be a deterrent to getting started. The “you don’t need to weigh yourself to go to the gym” mentality can be applied to ESG data and initiatives, one speaker said, emphasizing progress over perfection. As investors engage more with ESG, data quality and coverage is likely to improve over time, making it easier to “measure what matters.”

As engagement with ESG deepens, improved data quality and coverage are expected to advance concurrently, paving the way for a more comprehensive understanding of the issues at stake. By taking the leap and embracing the imperfections inherent in ESG data, it was said, investors can contribute to the ongoing refinement of metrics and reporting, ultimately enabling better decision-making and greater alignment with long-term sustainability goals.

4 Decarbonization requires holistic engagement

Decarbonization isn’t just about reducing emissions; speakers emphasized that investors need to consider inter-related factors such as biodiversity, clean water and ensuring a just transition. Engagement, in all its forms, is essential to achieving net-zero targets as an industry. By working closely with portfolio companies, investors can identify areas of improvement, provide support and drive meaningful change.

To reach ambitious decarbonization goals, collaboration across the industry will be necessary. Sharing best practices, insights and learnings can help investors collectively overcome challenges and accelerate progress.

5 Transparency is essential

While greenwashing – the act of presenting products, policies or initiatives as more environmentally friendly than they are – has been widely discussed, the lesser-known concept of “greenhushing” was also addressed at the forum. Greenhushing is the practice of under-reporting or remaining silent about positive ESG actions or achievements.
To avoid this, investors should embrace transparency and share their ESG successes while maintaining an honest and accurate representation of their initiatives.

Transparency plays a critical role in building trust with stakeholders, including investors, clients and regulators, speakers said. By providing detailed and accurate information on ESG efforts and achievements, investors can demonstrate their commitment to responsible investing and foster trust among their stakeholders.

Striking the right balance between becoming transparent and focusing on core competencies, can be challenging.

But panelists encouraged investors to focus on presenting a clear and accurate picture of their ESG performance, highlighting both successes and areas for improvement, for the good of all.