My four key learnings from a recent ESG conference

I recently attended the second annual conference organised by Real Deals and The Drawdown on environmental, social and governance policies within private equity firms and their portfolio companies. The theme of the conference this year was: ESG: Explore, Strategise and Grow and it was an exclusive platform for fund managers, investors and expert solution providers to tackle some of the most rapidly evolving and topical issues facing the industry.

 Here are my four key learnings from the day:

Social awareness is essential for ESG success

We already know that ESG is shaping the future of the private equity market, but other investors are slowly catching up to the runaway train that is ESG. There is, however, a common perception that ESG is socially conscious, but not necessarily valuable, let alone crucial, for businesses.

The Principles for Responsible Investment is publishing a report examining the state of ethical venture capital investment at the end of Q1 2022. This report has the potential to be ground-breaking, as venture capital can be hugely influential in the investment space.

Some leading voices in the ESG space argue that venture capital investment is incompatible with ESG, as it represents social and economic inequality on a fundamental level. But compared to other forms of financing, venture capital suits sustainable investment well. Venture capital funds can add value to sustainable start-ups by providing technical knowledge, industry relationships, or management skills, bringing the edge in addition to monetary contribution where larger institutions may be risk-averse.

With that, we must not diminish the importance of the “Social” element of ESG. Panellists agree that “Social” is a complex component of ESG, but essential to getting the “S” in “ESG” right. It is likely to impact the future of the private equity industry, constraining it because there’s less regulation and standardisation to provide guidance in this area.

Financing must go beyond simply being a source of capital

In terms of lenders, ESG targets can be built into their auditing process. It appears lenders are keen to be involved in ESG but don’t value sustainable business practices as highly as private equity and venture capital funds. Likewise, green bonds have been around for a long time, and the ESG discussion often happens, but the topic falls away. Moreover, retail banks now have sustainability targets, and penalties are hitting deals that aren’t satisfying ESG targets.

Ultimately, for financial institutions, fund managers and banks to have a meaningful impact on ESG, there must be an emphasis on value creation and positive social impact, going beyond money. We are in a decisive decade, and the decisions financiers make now will have a lasting impact on the business and environmental landscape, and safeguard for the future.

A dedicated ESG team is key to sustainability success

Traditionally, venture capital and private equity funds like to hire talent from other venture capital and private equity firms. However, when it comes to ESG talent, this is much harder to achieve, because it’s a relatively new function and talent is scarce. During the conference, a Head of Sustainability from a leading European private equity fund explained that he prefers to promote existing talent within the business into ESG functions. The argument is, these people will be much more bought into the business and its mission. And more often than not, those prepared to move into the function already have a natural interest in ESG outside their role.

However, this could be a hard sell to other investment funds that prize technical ability. Other authorities on ESG stated that individuals with a background in legal, compliance or investment management are a good starting place to source talent. Speakers at the conference also suggested recruiting people from NGOs, as they potentially have expertise beyond the corporate lens, with a more global and socially conscious view of ESG.

No matter which route you take when sourcing ESG talent, there is a lot of opportunity to up-skill your people. There are several ESG related qualifications available, including CFA ESG, CISL, and a Masters in Sustainability.