The interest in environmental, social and governance (ESG) leadership is rising among private companies. Historically, ESG has been the focus of capital markets, sovereigns and publicly traded companies. But now, private entities are realizing the benefits and opportunities that come with ESG alignment.
While corporations will use ESG ratings for internal ESG risk management, to promote capital raising activities, and drive marketing and communications, these are all investor focused activities. In the private market, the interest in receiving external validation of ESG practices and performance comes from a need to embed ESG factors into company strategies and business models. If ESG metrics are integrated into a private business at an early stage of development, and improved over time, it could result in a competitive advantage from an ESG standpoint, especially if the company considers a public listing in the future.
The Importance of Implementing ESG Strategies for Private Businesses
Obviously, every privately owned business’s ESG journey is different and depends on the potential growth of the company, the industry it’s in, or the jurisdiction in which it operates. Recently, Morningstar Sustainalytics hosted a webinar – ESG in the Lifecycle of a Private Company: How Stakeholder Demands Drive Sustainability in Private Markets – to address some of the questions private companies might have surrounding ESG and how it could impact their business. The panel consisted of Daphné Van Osch, Director of Corporate Solutions at Sustainalytics; Mark Reed, Chief Procurement Officer of Windstream LLP; Ivar Kvadsheim, Sustainability Advisor at Var Energi; and Maximillian Meyer, Executive Director at JP Morgan.
Each member of the panel brought their own unique perspective on ESG in the private market. Windstream switched from being a publicly traded company to a private entity, where ESG played an important role in its evolution. Var Energi became a publicly listed company after its initial public offering (IPO), implementing ESG at an early stage which made for a smoother transition. Finally, JP Morgan plays a supporting role, advising clients on ESG strategy and educating them on what capital markets and investors expect from private companies.
Why ESG Represents an Opportunity for Private Businesses
The discussion began with participants looking at the ways incorporating ESG into a business strategy might benefit a private entity. Meyer explained that since the 2015 Paris Agreement, global focus on ESG has increased and numerous studies and reports have linked ESG integration to operational efficiency and value growth. As for ESG ratings, Meyer noted it is a good jumping off point to determine a company’s material ESG issues.
He noted that ratings can help investors know how much a company is aligned with ESG trends. “It provides a framework of how well a company addresses and mitigates those ESG risks,” he said.
Attracting Capital by Embedding ESG
Meyer also pointed out that following the Paris Agreement, demand for sustainable investment has drastically increased. Private companies that prioritize ESG performance are more likely to attract capital from sustainable investors and funds. Engaging an ESG ratings provider can help private companies showcase their commitment to addressing ESG risk factors and those with positive ESG risk ratings may also benefit from reduced financing costs. Van Osch affirmed Meyer’s observations, noting she had seen a recent report indicating that having an ESG strategy is “no longer a nice to have, but a necessity.”
“Investors in public markets increasingly look beyond traditional financial statements to better understand the company's ability to create value over the long term,” Van Osch added. “Private market investors are also looking to ESG analysis to develop a more complete picture [to determine] a company's full potential.”
How ESG Can Enhance Transparency and Credibility
Van Osch put the question to the representative from Var Energi: “How did integrating ESG into your private business benefit [the company] during the IPO process?”
Kvadsheim explained that the scrutiny surrounding Var Energi’s ESG strategy and the attention paid to its ESG performance grew exponentially once the company went public. But since the company already had ESG policies in place at the time of the IPO, the company was prepared to meet ESG reporting expectations.
Reed from Windstream seemed to echo Kvadsheim, saying, “There is general consensus that not having an ESG program could negatively impact the company. There's also the chance that we eventually go public which will come with additional disclosure and reporting requirements. So, we've opted to prepare for this now, and are generally disclosing in line with current requirements for U.S. based organizations.”
Increasing Employee Satisfaction With ESG
While Reed says Windstream readily shares its programs, targets, and results with the public, he also revealed an additional positive that came out of his company’s attention to ESG reporting.
“We got the most favorable reaction from our employee base,” he said, “many of whom have taken great pride in the fact that they work for a company that continues to focus on and make strides in sustainability.”
According to a report from McKinsey and Company, a strong ESG program can help companies attract and retain top-level employees and enhance employee motivation by instilling a sense of purpose and increase productivity overall. Also, employee satisfaction is positively corelated with shareholder returns.1
Driving Operational Efficiencies
Reed also explained that Windstream’s ESG strategy has delivered some tangible and financial benefits to the company. The first example was an initiative to modernize the company’s network, which improved the customer experience and came with significant power savings, and therefore, lower costs.
His second example of ESG activities that benefited his company’s bottom line was the decommissioning of older vehicles in Windstream’s company fleet. This allowed the company to have a much younger fleet and take advantage of lighter vehicles with more fuel-efficient engines, saving money on fuel.
External Support for ESG Integration
At a time when sustainability and responsible business practices are becoming global priorities, private companies need to understand the importance of investing in a robust ESG strategy. However, often private companies do not have the resources available to dedicate to a sustainability team. For private companies to avail themselves of all the benefits discussed during the webinar, they can utilize external expertise to help guide them through the implementation of an ESG strategy. ESG ratings providers can help companies understand their current ESG performance and identify areas for improvement, allowing them to in turn attract capital, strengthen stakeholder relationships, and drive efficiency. With an ESG rating, private companies can demonstrate their commitment to sustainability and the environment, while standing out from their competitors.
Want to learn more? Watch the full webinar on-demand to gain valuable insights on how integrating ESG factors into business strategies can help private companies find new opportunities and drive sustainability.
Risk and Opportunity in Biodiversity: How Sustainable Finance Can Help
This article outlines how biodiversity loss poses material risks to business and how it connects to many other issues that companies can’t ignore. In addition, it covers how biodiversity conservation presents substantial economic opportunities, and how businesses can address and access these opportunities by issuing linked instruments that integrate biodiversity considerations.
Today’s Sustainable Bond Market: Boosting Confidence in Sustainable Bond Issuances
In this article, we examine the kinds of sustainable bonds offered in the market, some of the key regulations being developed in different markets and the current initiatives to improve the quality and credibility of issuances.
Webinar Recap: How Integrating ESG Can Drive Opportunity for Private Companies
Recently, Morningstar Sustainalytics hosted a webinar – ESG in the Lifecycle of a Private Company: How Stakeholder Demands Drive Sustainability in Private Markets – to address some of the questions private companies might have surrounding ESG and how it could impact their business.