The British Columbia Investment Management Corp. is seeing higher returns in the private equity market following the adoption of an environmental, social and governance lens, according to a new study from the investment organization.
The report’s co-author, Evan Greenfield, managing director and head of ESG for the private equity arm at the BCI, wants other institutional investors to see that by putting ESG front and centre, their returns won’t take a hit and, in fact, can increase.
“When I joined the organization, I had this view that you could leverage ESG for significant value creation and quantify it. Over the last several years, we’ve been able to do that time and time again on our direct portfolio — irrespective of company, industry or geography.”
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The whitepaper, which was produced in partnership with Stanford University’s long-term investing initiative, found ESG initiatives can contribute in a financially material way to earnings before interest, taxes, depreciation and amortization improvements, as well as reduce operational risk and strengthen exit readiness.
The report used real case studies to demonstrate a practical approach to enhancing private equity financial performance with ESG considerations. The companies considered were in logistics and transportation, manufacturing and specialty insurance broker.
ESG advocates have faced a swelling resistance to this investment lens, with some U.S. jurisdictions fighting this approach in court for investors. At the same time, globally, some investor alliances built on the premise of fighting climate change with capital decisions have disbanded.
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“We are leveraging ESG, not as a political, philosophical or ideological goal . . . we’re leveraging it to enhance risk-adjusted returns for our clients.”
Greenfield says the overarching challenge for ESG adoption is referred to as a lack of standardization for institutional investors, noting a survey — which asked 20 different ESG heads across alternative asset managers what their definition of ESG was — yielded a range of different answers.
“If the so-called ESG experts can’t reach consensus as to what this is, how can we expect investment professionals and private equity and other asset classes to integrate it in their investment process?” he adds. “How can we expect, more importantly, management team members of portfolio companies to integrate it as a core part of strategy?”
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Moving forward, he hopes the study can help catalyze a movement within private markets to leverage ESG and macro tailwinds behind sustainability to enhance risk-adjusted returns.
As an asset owner, Greenfield says the BCI doesn’t want to impose an administrative or cost burden to its portfolio companies as part of its ESG mission. “These companies have finite human capital and financial capital.”
He recalls senior management at one portfolio company expressed ESG was of no help to the firm. “What we did is we dramatically transitioned and transferred that knowledge base and that viewpoint and ESG became a significant profit center for that company. It became embedded in a core part of strategy and [assisted] them with product differentiation, supply chain diversification and competitive advantages.”
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