Consumer sentiment goes hand in hand with a personal motivation to ‘do the right thing’ – concerns around the positive environmental contribution of corporates are high, particularly among millennial employees. Almost two thirds (62%) of millennials agree that it’s important to them to know they are making a positive difference in the world (Global Millennial Survey 2020, Deloitte).
This goes to show how ESG is no longer an investor-led, compliance-driven requirement, but an important factor to sustain consumer satisfaction and profits, and key to attracting and retaining top talent.
Is it possible to unite impact with returns?
One of the biggest misconceptions about ESG is that by focusing on delivering social value, businesses will “take their eye off the ball” and profits will fall, at the expense of shareholders (Figure 1). Numerous economic and recognised finance industry leaders have been focusing on debunking this myth, for example:
- Speaking at the National Social Value Conference in 2020, Nigel Wilson, CEO of Legal and General highlighted this myth as a huge misunderstanding: “being socially useful or economically useful is not a zero-sum game” he said.
- In his 2021 letter to CEOs, BlackRock’s CEO Larry Fink emphasised that a business strategy focused on delivering purpose for customers, employees and communities will provide a competitive advantage in the long-term and durable profits for shareholders.
- Economist Alex Edmans in his most recent publication stresses that “when all members of an organization work together, bound by common purpose and focused on the long term, they create value in a way that enlarges the slices of everyone – shareholders, workers, customer, suppliers, the environment, communities and taxpayers” (Figure 2).
Welcome to the “pie-growing” mentality! Testimony that a company’s stakeholder capital is a financial issue for all investors and should therefore be on the agendas of all private equity funds.
What can we do?
We have a responsibility to educate ourselves, educate our colleagues and educate our management teams. According to the BVCA, there are approximately 5000 businesses in the UK currently backed by UK private equity and venture capital and altogether they employ c.a. £1m people. We have the power to drive sustainable change and support our portfolio companies to be commercially successful whilst also being socially responsible. It is not only an opportunity, but also our responsibility, to provide them with the long-term context necessary to thrive.
Here at Horizon Capital, in the last 12 months, we have been working on moving the dial on the ESG agenda. We have moved from a reactive, compliance driven ESG approach to a proactive reporting one. We have partnered with the Social Value Portal who have helped us develop a framework to measure the positive impact that our portfolio companies are generating from an ESG perspective.
With their help, we have also improved our corporate ESG Policy to reflect our current strategy and ambitions. Finally, we have assigned responsibilities to a senior team member to oversee the development of the strategy. In the next couple of months, we plan to use the expertise and structure we have developed to drive change and improvement across the portfolio.
Click here to find out more about how we incorporate ESG criteria into our investment approach.