What ESG Needs to Get Investors’ Attention

Having ESG considerations designated as ‘material’ may help drive further adoption of these value creation and risk mitigation principles, say three experts. In addition, investor understanding of ESG is helping firms raise money from very sophisticated LPs.

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“Materiality” Drives ESG Acceptance
ESG in Private Equity Comes of Age

David Snow, Privcap:
Today, we’re joined by Elizabeth Seeger of KKR, Andy Kuper of LeapFrog Investments and Michael Rogers of EY. Welcome to Privcap today. Thanks for being here.

Unison: Thank you.

Snow: Do you see evidence—especially here in the U.S., where maybe there’s been slightly more resistance to ESG than perhaps in Europe, where it had its earliest advocates—that people are beginning to see the real-world applications of ESG?

Andrew Kuper, LeapFrog Investments:
[At] companies like LeapFrog that have adopted very strong ESG-style policies and even beyond ESG policies, we talk about profit with purpose where you generate a synergy between profits and purpose, between the return and the social impact. Companies doing that are increasingly doing better and better in terms of raising capital in these markets.

Elizabeth Seeger, KKR:
There are a number of signs that things are changing, particularly here in the U.S. market. I think one of the best, or most public, indications of that is the Sustainability Accounting Standards Board, also known as SASB, which has been working over the last three years to define what could be material ESG-related issues for companies throughout the U.S. economy. And what’s most interesting about their approach is that they are really using and relying on the existing definition of “materiality,” as defined by the U.S. Supreme Court and the SEC, to say, “Hey, these ESG-related issues could be material to you from a financial perspective and, therefore, there are regulations already existing on the books that say that you should be disclosing these issues.” And, if that becomes successful over time, I think that will really be changing a lot of the conversations we’re having here in the U.S. in terms of what is ESG? Is it material and how do we talk about it?

Snow: How have you seen the investor base change by way of consciousness of ESG?

Seeger: I see evolution on the topic globally. Certainly, there is more dialogue here in the U.S., but I would say [that] even in Europe, the dialogue has changed over time, so I see a lot more focus across investors across the globe on the topic of materiality and what’s important for particular companies in particular areas. Again, as we’ve been discussing before, how do we drive value through that?

Michael Rogers, EY:
I see ESG as something that has gotten started. It was a little later than probably it should have, but it has started. Now, as Elizabeth was pointing out, it’s going to be something that, over time, will become more and more important to all the funds.

Seeger: U.S. pension funds have been focused on ESG-related issues in public equities in some way or another for a while now, whether it’s socially-responsible investment screens or shareholder resolutions or that sort of thing. I think it wasn’t until recently that maybe the private equity alternative asset classes became or fell in the spotlight as, “Oh, wow!” Actually, in private equity, you have long-term, active ownership which could be a really excellent platform for driving ESG-related initiatives or supporting portfolio companies on ESG-related initiatives.

Kuper: LeapFrog has many of the largest insurers and pension funds in the world now in the investor base, but that’s not how it started. It started with telling a story that was much more unfamiliar to people and putting this at the absolute core of the story—profit with purpose—was alarming to some at the beginning. Over time, it’s come to be something that people feel much more comfortable with. You can even see a very significant movement within those pension funds and insurers and family offices and so on towards how do I get to cutting-edge opportunities and—in a relatively low growth environment, how do I get to the high growth while having adequate protection?

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