Building the Business Case for ESG
To be successfully implemented, a firm-wide ESG strategy requires internal buy-in that begins with leadership. Successfully making the case for ESG involves identifying key stakeholders, illustrating the value of ESG to the firm, conveying the urgency, and demonstrating the financial benefits to the firm and portfolio companies. The following best practices can help ESG advocates make the business case for a sustainability focus at their private equity firm.
01. Demonstrate the financial value. Effective ESG integration helps investors mitigate risks, cut costs, and ensure higher valuation of portfolio companies at exit. ESG metrics GPs track on the Novata platform have been tied to higher EBITDA. The business case should highlight the financial added value of integrating ESG as well as the cost of the absence of an ESG focus on access to capital and creating blind spots in managing investments.
02. Communicate the urgency.Changing regulations around ESG disclosures, such as the EU’s Sustainable Finance Disclosure Regulation (SFDR), and rising pressure from LPs point to the inevitability of ESG reporting in private markets. It takes time to build an ESG strategy and report on metrics, so the time to get started is now.
03. Address stakeholder concerns.Internal stakeholders, including senior managers, investment teams, those tasked with investor relations, and portfolio company leaders, may have pushback against ESG. Understanding these concerns will prepare you to respond as you make the business case for ESG.
04. Outline budget needs.When presented with a new initiative, leaders want to understand the problem it is trying to solve, the benefit, and the cost. Identify the resources needed to effectively implement an ESG plan, including skills, expertise, and technology solutions, as well as associated costs upfront.
Source: Edelman
Increased requests from LPs
Meeting regulatory disclosure requirements
Better risk management and value creation
