A Word from
Our President
Throughout my 16 years as a public market investor, I read countless reports on ESG. It was clear that ESG was going to be a major trend for businesses of all types, but none of these reports actually helped me understand how to integrate these environmental, social, and governance (ESG) factors into investing.
Here is my top guidance for navigating ESG, drawn from hundreds of conversations with general partners (GPs) and limited partners (LPs):
01ESG isn’t only about making the world a better place. It's about smart and risk-averse business practices that make businesses more valuable. Impact investing is about making the world a better place, potentially at the cost of some financial return. Impact and ESG are two very different disciplines. 02Most GPs raising institutional money find they need to have or commit to having a coherent ESG strategy. “Coherent'' doesn't mean you need to have every last detail sorted out, and it’s not that hard to have an ESG strategy that satisfies the market.
03Most GPs are already doing ESG in some capacity—they just don’t know they are and need help tracking, packaging, and communicating it. Most GPs also already have several examples of “ESG Champions” in their portfolios.
04What many (North American) LPs most want to see from GPs is value creation initiatives driving higher EBITDA or lower discount rates that also have a positive environmental or social benefit.
05For many years, ESG has been an alphabet soup of different standards and metrics. The ILPA ESG Data Convergence Initiative (EDCI) has created clarity and alignment on the baseline of 17 ESG metrics that matter to LPs and GPs. This has made it easy to get started on ESG data monitoring for portfolio companies.
LP expectations for GPs to prioritize ESG will only continue as the connection between these factors and financial returns becomes clearer. Getting started with ESG data collection now puts GPs in a good position to not only respond to increasing pressures, but also to take advantage of the benefits that drive better business outcomes. I hope the insights that follow can serve as a guide for the initial steps along the ESG journey.
Scott KennedyPresident and Chief Strategy Officer, Novata
