April 27, 2015
Interviewed by: David Snow
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Benefits of a Robust ESG Strategy

While ESG started out as a way for private equity firms to better understand the emerging markets they were investing in, many are seeing a correlation between a robust ESG strategy and a higher IRR, says Michael Rogers of EY.

While ESG started out as a way for private equity firms to better understand the emerging markets they were investing in, many are seeing a correlation between a robust ESG strategy and a higher IRR, says Michael Rogers of EY.

Benefits of a Robust ESG Strategy
With EY’s Michael Rogers

Where does ESG come into play in PE investing?

Michael Rogers, EY: Where we first saw the advent of ESG was in the emerging markets, of course, because as some private equity players from around the world ventured into some of the outlying markets, oftentimes they were struggling to make sure that the work they did there had a positive impact on the communities they were involved in. Oftentimes they had to work and get the agreement from governments to participate in some of these marketplaces, and it had lasting impact on the employees, the communities and the business markets they worked in.

That has become more and more prevalent as these entities have grown larger, larger scale, doing more deals around the world, going into new markets that may be experiencing private equity for the first time. And we’re starting to see a number of the bigger funds create groups that are focused on this to make sure that, when they do make investments, obviously they’re targeting attractive returns, but at the same time looking to make sure they do well and do good, if you will, for the communities they’re involved in.

That migration has also had an effect on most of the larger private equity funds on a more global or developedmarket basis as well. You now have many of those funds creating units within their businesses to specifically focus on this to make sure that not only are they doing this in the emerging markets, but they’re doing it in the developed markets as well. And most of them have found that the simple things they’re doing to enhance the businesses or make sure they’re working better in their communities are just basic good business policies.

And there are things that, if you stand back and look at, you’d say, “That’s just the right thing to do.” And yet it’s often the right thing for the business as well. So what we hear a lot from these organizations is, “We do the right things for the companies, for the communities and for our people and that tends to repay us in terms of returns to our portfolio.”

How do you define ESG in a developed market?

Rogers: I think in the developed market, it tends to be more around the employee side, making sure the policies are in place to enhance the opportunity for employees and that the policies are consistent with other large corporates around the world that operate in these markets as well. But you definitely see it on the environmental side as well, where people are looking at impact and sustainability of their businesses.

I think everybody goes into these entities—they really would prefer not to be seen as somebody who pollutes or causes a problem in these communities. So, a lot of times, you see it around those two aspects. Making sure that employees and the communities are focused on correctly, but also making sure they’re corporate citizens in terms of taking care of the environment and making products that are in tune with today’s positive environmental organizations.

Can investors point to ESG as a reason for a good IRR?

Rogers: Okay. Initially, when most first firms looked at ESG, they looked at it from a riskmitigation perspective. The concept was to minimize the risk to that particular investment and to the broader enterprise within private equity. Now you’re starting to see people really begin to believe they can make changes from an ESG perspective that are actually good for the business. And while it may not always be easy to identify an extra point or two of return that you may gain from adopting some of these policies, I think it’s pretty common knowledge now that doing the right thing at a lot of these organizations—making the right moves, pulling the right levers relative to people, community, environment, things of that nature—[is] good for the business, which ultimately does enhance returns. And we’re starting to see people put that connection together. I think the fact that many of these firms have created groups to focus on this is not just totally around risk mitigation. They’re looking at this as a way to enhance returns on their business over time.

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