November 11, 2020
Kate Trowbridge, Director of Retail and Consumer Goods at Drax, and Vish Srivastava of Future Business Partnership, discuss ESG and the burgeoning trend towards investing for good.
There are two documentaries, released on Netflix in the past month, that have everyone talking. The first is David Attenborough’s latest feature documentary, ‘A Life on Our Planet’, which reflects on humanity’s devastating impact on the natural world and the urgent need for change. The second is ‘The Social Dilemma’, a terrifying examination of the ways in which big tech companies manipulate human attention for profit.
What do these two documentaries have in common? At first glance, not much. One raises the crucial issue of sustainability, or lack thereof, in the modern world; the other focuses on the morality of the companies that use our data. However, it is the overwhelming popularity of both wherein lies the common theme: this generation has an increased awareness of environmental and social responsibility, and they’re doing something about it.
In the wake of recent crises such as the Australian bushfires, the BLM movement and COVID-19, the world is on the precipice of change, led by a generational shift in thinking. Greed is no longer good, and sustainability and social change are the watchwords of the day. And of course, this affects investment decisions.
What Does This Mean For Private Equity?
We are seeing a shift away from the traditionally exclusive focus on financial gain, and towards the topic of Environmental, Social, and Governance or “ESG”. So how is ESG being employed in the world of private equity, an industry not historically lauded for its focus on this topic?
In their Private Equity Responsible Investment Survey 2019[i], PWC noted that PE houses and their investors are increasingly engaging with responsible investment. Of the 162 PE firms they surveyed, they found that 91% of respondents have already adopted or are currently developing a responsible investment policy. And a vast majority (72%) either currently use or are developing KPIs to track, measure and report on the progress of their policy. The number of dedicated responsible investment or ESG teams is also on the rise at 35% (compared to 27% in 2016).
There are several ways to incorporate ESG considerations into PE. For larger outfits, the launching of sustainability focused funds is one example. In 2016, alongside Bono, Richard Branson, and eBay founder Pierre Omidyar, private equity firm TPG launched the Rise Impact fund. The offering committed to “deliver positive and sustainable impact” while creating a “top-performing fund.” At the time, Bono remarked that “capitalism is going up on trial, and I think that it’s clear that putting profit before people is a non-sustainable business model.” Bain Capital followed suit, launching its own Double Impact fund, and KKR recently closed a $1.3 billion impact fund.
Elsewhere, ESG performance is being employed as an incentive. In June 2020, the Sweden-based private equity firm EQT AB announced a EUR 5 billion ESG-linked fund level bridge facility, which stipulates that portfolio companies will receive better financing terms as their ESG performance progresses and improves. This ESG-linked bridge facility is the first of its size in global fund financial markets to incentivise portfolio companies to improve their performance in terms of gender equality, renewable energy adoption, and sustainability governance policies.
We are also seeing a rise in the number of funds focused exclusively on impact investing. However, here we see a different issue; one of the biggest difficulties in persuading people to invest in ethical or sustainable businesses is overcoming a perception that they will receive inferior returns.
Tracey Huggett and Vish Srivastava are addressing this concern head-on in their new impact private equity firm, Future Business Partnership, which they have set up to invest in consumer goods businesses – B2C and B2B – which are making a positive difference to the world. They aim to put sustainability right at the heart of their value creation strategy, as well as their firm itself, and show that rather than there being a compromise, investing for positive impact can actually drive superior investment returns. Or as the tagline on their website puts it, ‘Sustainability without sacrifice. Growth without Compromise.’
Vish says: “We believe that you should not have to sacrifice financial returns in order to create a positive impact. We are showing the world that we can make money and deliver impact without sacrificing either goal. That is important to us. We are in a global emergency and the biggest thing stopping the solution is people assuming that there is a trade-off between making money and doing good. The quicker we can show them that you can make money by doing good, the quicker the world will start to shift considerable resources into positive change.”
If 2020 has taught us anything, it’s that when we need to, we can implement enormous change on a global scale in a matter of weeks. In light of this, there is little excuse for businesses to drag their heels when it comes to better ESG practices, and this applies to everyone, from start-ups to corporate behemoths, from PE to politics.
A crucial aspect of this step-change will be developing responsible leaders who exemplify ‘business as a force for good’. One of the ways in which ESG drives business success is through the attraction and retention of talent who drive a company forward through shared values and shared purpose. A new generation of star performers who want to work for more than just the money are now becoming senior enough to lead businesses, and we at Drax are committed to ensuring those people find their way into the right roles, and that we connect companies with capital to aid growth for good.
If this article has resonated with you as a business leader, or you are curious to learn more, please do get in contact.