According to Harvard Business Review:
What is a Pragmatic approach to ESG in Private Equity?
A recent conversation with a Managing Director at a private equity firm helped change our business.
Two key insights set us down a new path:
INSIGHT 1: ESG Vendors are missing the mark in terms of what they are offering private equity firms
He confirmed much of what we'd been hearing about an increasing urgency for private equity firms to get serious about ESG. He then shared that they had just spent close to $100k with a large consulting firm that he thought would help them get a handle on their ESG strategy.
Six months and nearly 6-figures later, he had a 125-page report that, in his words, "really didn't say anything."
We realized there were two big extremes when it came to vendors trying to help private equity firms operationalize ESG initiatives across their firms and portfolio:
Option 1: Consultants that charge a lot produce work that "doesn't say anything."
Option 2: Technology platforms that assume their users know everything there is to know about ESG
The divide is massive and has created a lot of pain for private equity firms looking to operationalize ESG. The market needs a partner that can provide ESG consultation explicitly designed for private equity and leading technology to launch and manage ESG programs.
INSIGHT 2: Private equity firms want to do more than just 'check the ESG box.'
From the same Managing Director:
"We've had an ESG statement on our website and our marketing material for a few years. It bugs me that we have this statement but don't actually do much with ESG. If we are going to talk about it, I want to really do something... I want to approach it as a way to improve the quality of our portfolio."
This is the right mindset. However, we often see that the tactical components of developing and deploying an ESG strategy result in PE firms losing sight of this goal. The perceived chaos associated with understanding ESG frameworks, choosing metrics, and collecting data across the portfolio leaves the firm stuck in "the annual report mindset." A mindset that focuses on a 1x per year effort that produces slick marketing material.
Corecentra advocates for the use of an Impact Value Creation Plan. When used correctly, these ensure the focus stays on creating value through ESG.
Here's how it works:
- Develop ESG pillars that align with your firm
- Utilize progressive ESG diligence starting at the earliest phases of a deal
- Through the lens of your pillars, plus data gathered through diligence, identify 2-3 value-creating initiatives
- Proactively manage these initiatives across your portfolio
Impact Value Creation Plans are a great way to ensure you stay focused on the bigger picture. Feel free to contact us for more detail on how to develop your firm's unique Impact Value Creation Plan framework.
We've set out to redesign our platform to meet private equity firms where they are. The goal was simple - give private equity firms the right mix of ESG guidance and ESG technology. Plus, help our clients stay focused on value creation throughout their ESG-related activities.
The result is the Pragmatic Approach to ESG for Private Equity:
- Consultative services to help you establish the right ESG framework for your portfolio
- Manage initial communication with, and collection of data from, existing portfolio companies
- Design progressive ESG principles that can be deployed during due diligence on new deals
- Help establish and proactively manage ESG Value Creation Plans for the entire portfolio
- Deliver all of this through technology that simplifies ongoing management, communication, and reporting across all stakeholders
ESG is not a new concept for private equity firms. But, the effort to operationalize ESG as a value-creation lever is a more recent strategy for many firms.
The Pragmatic Approach to ESG is designed to quickly, efficiently, and effectively help private equity firms create value through ESG.