ESG in private markets: Insights for 2023

Environmental, social, and governance (ESG) factors are critical business issues for public and private companies alike. In our view, understanding and incorporating material ESG factors as early as possible enables more informed and strategic business decisions (Figure 1). Yet less than half of private company boards assess ESG-related risks and opportunities.¹  We therefore believe it is essential to work with our portfolio companies to proactively tackle their distinct ESG issues.

Importantly, many private companies are well positioned to address ESG factors, as they’re already tracking relevant metrics and working toward improving specific issues. We hope our insights as public and private market investors can help our portfolio companies leverage that work and adapt to growing ESG expectations — so they can remain focused on their core businesses.

Why ESG matters for your private company 

We believe ESG matters in private markets for the same reasons it matters in public markets. In our view, strong ESG practices can potentially help private companies: 

• Improve financial returns. Material ESG issues, such as climate risk, talent management, and board composition, can affect a company’s financial performance and long-term intrinsic value.
• Establish stronger brands and wider competitive moats. It is increasingly common for consumers to reward companies with strong ESG practices. For instance, 66% of US consumers are willing to pay more for products and services offered by socially and environmentally responsible brands.² There is also a growing recognition that a company’s ESG profile can affect its culture, regulatory risk, reputational risk, employee productivity, and ability to attract and retain top talent. 
• Draw a broader pool of investors. Asset owners and institutional money managers are now more focused on ESG. Crucially, ESG assets are projected to grow substantially in the coming years, both in absolute terms and as a percentage of overall assets (Figure 2). In the public markets, companies should expect to be held to higher governance standards, including by ESG rating agencies and proxy advisers. 
• Reduce the risk of being a target of shareholder activism. Activist campaigns are often focused on improving corporate governance as a way to unlock shareholder value, and there are signs that lagging environmental and social practices will be more and more frequently highlighted in proxy contests. The number of shareholder proposal votes in 2022 increased 27% from 2021, with the majority of those proposals focused on ESG. Specifically, shareholder proposals related to companies’ social practices jumped by over 75% and environment-related proposals more than doubled.³

When companies go public today, there’s much greater scrutiny of their ESG practices than ever before. Yet just 20% of companies say they are “very ready” to talk to investors about ESG issues.⁴ In our view, the earlier boards and management teams start to think about and address the ESG factors that are material to their businesses, the better.

What ESG factors are material for your business? 

The market often refers to ESG as being one thing, but in reality, there are many different factors that fall under the ESG umbrella. For instance: How is a company positioned to mitigate climate-related risks? Does it monitor working conditions across its supply chains? How does it look to build a diverse, inclusive, and equitable workforce, and how does its culture help…

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¹Source: National Association of Corporate Directors, 2022 Private Company Board Practices and Oversight Survey. | ²Source: GreenPrint, Business of Sustainability Index, June 2022. | ³Source: ISS Governance Analytics, data for Russell 3000 companies compares January to June 2021 and January to June 2022. | ⁴Source: “The Purpose Action Gap: The Business Imperative of ESG,” Barkley & Jefferies, July 2021.