Why private-market investments are well suited for ESG impact

Investment head at Schroder Adveq makes a strong case for private equity as a tool to drive sustainability

Why private-market investments are well suited for ESG impact

Over the past year, ESG has seen a coming-of-age in the public markets. Whether it’s the rise in ESG assets, the proliferation of responsible investment funds, or the rush of providers offering ESG indices and rating systems, the indicators of change are mounting and undeniable. Investors in the public space are elevating their objectives, putting their dollars in companies that don’t just do well in their portfolios, but also do good in the wider world.

But while there’s no questioning the momentum of sustainable investing in the public markets, whether it’s the best route to deliver impact is another debate entirely – especially when one considers putting their money in a more rarefied space.

“I would argue that the private markets are a better place for an investor to apply their sustainable goals than the public markets,” said Lee Gardella, head of Investment Risk and Monitoring at Schroder Adveq. As an early signer of the Principles for Responsible Investing (PRI), Schroder Adveq operates on a conviction that sustainable investment practices help drive long-term value creation for its clients, employees, and society at large.

One point in private markets’ favour, Gardella said, is the vast land of investment opportunities it offers. While public exchanges can have hundreds or thousands of companies, that number can get narrowed down very quickly for those who invest according to a strict set of principles or values. By comparison, the private equity space, as well as real estate and infrastructure, offers a much broader and deeper pool of investments for consideration.

“Because you’re buying into a meaningful ownership position of a company, your access to information and ability to really delve into ESG issues is far more profound on the private side,” he added. “You can evaluate the relevant factors relative to ESG issues that would apply to the business model, and you can determine early on if the company’s approach to ESG is consistent with your values as a responsible investor.”

Another advantage for those investing through the private markets, Gardella said, stems from the much longer-term orientation they have. Investments are illiquid, with capital locked in for at least three years. The ability to be patient enables private investors to put deep thought into their decisions, with an eye toward long-term secular trends that may push an industry forward – or, alternatively, put it under pressure.

“Take for instance, the energy sector,” he said. “Clearly, it’s a necessary piece of the economy. But if you’re not trying to do it better every day from an environmental perspective, it's going to be difficult to really garner a good valuation. Regulators and governments are cracking down, and people are moving their capital away from the traditional oil and gas segment.”

The logic is equally compelling from the perspective of positive investment. As Gardella noted, there are countless examples of businesses that have done very well both from a financial-return standpoint as well as through an ESG lens. A lot of attention has been placed on the environmental pillar of ESG, but the social piece – considering the benefits of the individual and society – is getting much-deserved consideration.

“Many companies out there are able to demonstrate that they see employees not just as a liability, but an asset. It's really a concept of what we call quality jobs versus bad jobs,” Gardella said.

Companies that put a premium on talent don’t stop at providing better wages. They also open opportunities for employees to access affordable healthcare, and engineer manageable or predictable schedules that people can command their life around. Engagement programs, employee development, and diversity initiatives are other areas where companies have proven their commitment to nurturing the human element of their businesses.

“These companies are proven to be winners, because they have employees who are not looking to trade up to a job at another company,” Gardella said. “They stick with the company because they are engaged and see the opportunity to develop a career. The employee in the end is willing to give more of themselves to the company because the company gives them a lot as well. It's a management and leadership challenge, but one that if companies embrace and execute upon it, can be very powerful.”

Companies’ commitment to the social side of ESG has most certainly been tested over the course of the pandemic. For large institutional investors whose private investments cover the restaurant, hotel, and retail industries, the crisis has been a true opportunity to show character as they proactively and thoughtfully address how their employees have been impacted – through employee assistance programs and mental-health support, for example. The ones who can do that successfully position themselves for stability through crisis, Gardella argued, as employees who feel protected are more likely to be steadfast contributors to the value of the business.

“As a private investor, you generally have a meaningful ownership position as well as a controlling position with seats on the board,” he said. “That means you have direct influence to motivate the company, whether it’s to address a particular ESG issue while pursuing a particular path toward growth.

“At the end of the day, I think investment organizations must be true to their values, and ensure those values are responsible and sustainable,” Gardella said. “Our guiding principle for Schroder Adveq is for clients to be proud of how we make money for them. I believe in the long run, that's a very powerful and very successful approach to private equity investing.”


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