“To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to the society” ~ Lary Fink, Blackrock CEO Venture Capital & Private Equity firms are critical to the financial ecosystem given how they facilitate employment, innovation & impact. They influence the investment chain by underwriting the future of business in many ways and they must fund innovations that help eradicate some of the gravest societal issues. They have the opportunity to establish a positive impact vis-a-vis culture, values, and behavior. When early-stage companies are bought by strategic corporate buyers which could be publicly listed, private equity firms, or IPOs – how they are managed in the beginning largely determines success and their impact. ESG is an invaluable success differentiator that is critical across all sectors – customers, employees, shareholders, lenders, rating agencies and regulators are all now blatantly demanding positive business contribution and appropriate business conduction. Businesses not taking ESG seriously are beginning to lose customers, employees, and financing, to eventually go completely unviable. Stakeholders are pushing for increased transparency and market lenders and ESG appropriating their strategies. Why should you and your companies care? 1. The Pandemic COVID-19 has placed greater importance on resilience and ethics as opposed to efficiency, presenting businesses with an unmatched opportunity to incorporate ESG into their core operations. The short-term reduction in GHG emissions that was witnessed has been countered by a rapid rise in fossil fuel consumption with the economies restarting. 2. Regulations It is now required to be ESG compliant by various regulators such as UK Companies Act, Taskforce for Climate-Related Financial Disclosure, and EU Requirements. Countries are increasingly pushing companies to report their climate-related risks on a mandatory basis, which is based on the TCFD framework, imposing a complex challenge for them as far as their readiness is concerned. 3. Low Carbon & Circular Economy It’s well established that current ways of power generation are unsustainable, compelling industries to reduce their carbon footprint and become energy efficient. The global demand for energy is predicted to only increase by 26% over the next 20 years. The time to act is now! It reduces costs of raw materials sourced Frees working capital Facilitates revenue generation Helps with customer retention by catering to their sustainable demands KPMG estimates that “40% of global emissions can be reduced if circular economy strategies are applied to the four key sectors” It also helps mitigate risks by allowing for a flexible business model that utilizes new tech & future optimization. (Internet Of Things, Track and Trace, and BlockChain) Investment requirements from lenders now require certain sustainability reports that are to be integrated with circular KPIs. 4. Pressure from investors & society Sustainability integrated portfolios provide better risk-adjusted returns to the investors, hence the pressure! As the ESG spectrum considers aspects of resilience, climate, materiality, business ethics, health, safety, and is people-first, there is no escaping corporate accountability. Investors have realized that ESG risks are basically long-term investment risks. A recent Gartner report, represented at the Gartner CFO & Finance Executive Conference highlighted that 85% of investors considered ESG factors in all their 2020 investments. 91% of banks, 71% of fixed income investors, and 90% of insurers monitor ESG 67% of banks perform an ESG-related portfolio screening How to actually implement it? Adopting a holistic and proactive approach toward improving sustainability performance is essential for business leaders. Here’s a step-by-step guide to help you start the integration process through three stages – Basics, Core & Communications in a way that addresses corporate governance, risk mitigation, strategizing, and reporting. How to assess your Portfolio Company’s ESG materiality impact…. Materiality basically refers to the principle of defining the social and environmental topics that matter most to your business and your stakeholder, more so as a strategic tool. This is how you broadly conduct a materiality assessment. Define objectives and what materiality means to your business or portfolio company, along with the parts the assessment will cover Rectify under which scope (1,2, or 3) does the most significant impact occur. Make a comprehensive list of all potential material topics after reviewing various sources (SASB Materiality Map), GRI, annual ESG reports, etc. Discuss these potential topics with key stakeholders to gain a wider perspective. Compartmentalize the potential material topics and align them with your portfolio company’s existing strategy and policies. Keep stakeholders engaged by collecting and collating their feedback through interviews, surveys, and focus groups. Internal & external stakeholders must take part in rating the material topics Define the methodology that will be adopted for scoring and rating the topics, which will be industry and sector-specific. Prioritize and assess the material topics based on the scores, business impact, and significance to stakeholders. Set a threshold for defining what will effectively qualify as material. (This could also be used for enterprise risk management) Present the materiality assessment conclusions to the BOD & C-suit for approval, with recommendations and also disclose these results in the ESG report. Simply put, incorporating ESG prevents greenwashing, the practice of pretending to be incorporating the sustainability narratives to manipulate public perception. It is mere tokenism and the EU has gone on to affirm that if the business is not ESG compliant, it’s greenwashing. Therefore, in order to stay protected from the long-term corrosive effects of to an extent of climate-proofing the business, ESG makes for the safest bet as the inert accountability makes it impossible to propagate false claims.
