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The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Private companies are increasingly asked to integrate ESG into their businesses, and many may be wondering what factors are most relevant to their company and how best to begin addressing them. Our ESG insights for private companies content series aims to help our portfolio companies navigate the rising importance of these topics in private markets. Critically, the material factors a company may face can vary widely by industry and geography. For example, though governance factors — such as shareholder rights, board composition, and executive compensation — are generally applicable across sectors and industries, not all environmental or social factors are equally material for all companies.
The concept of materiality is also evolving. We define materiality as the most significant ESG issues that will impact a company’s financial value. But companies with global investors should be aware that there is increasing interest in “double materiality” which also includes a company’s broader impact on the environment, economy, and people.
Here, we explore ESG materiality assessments, including why they are important and how to conduct one for your company.
Companies often have a bigger sphere of influence than they may realize. Part of doing a materiality exercise is seeing where your business may create negative externalities in its value chain. We think this can help you develop a richer understanding of your business, its impact, and what issues, practices, and policies are most important to key stakeholders. Once you have identified your company’s most material ESG risks and opportunities, you can use the resulting insights to help you better address these issues in your strategic planning and reporting. This is an important risk-management tool that the board and executive team can use to steer the company most efficiently by prioritizing where time and money are allocated. Critically, research suggests that companies focused on their strategy to address material ESG factors for their industry may outperform over the long term, while there is an implicit opportunity cost for companies that focus their efforts on immaterial factors.1
Creating a materiality matrix that examines and incorporates various stakeholder needs thus helps in identifying unaccounted future costs and opportunities to business. We believe such an exercise will make businesses more resilient, encourage more informed decision making, and save costs through sustainable partnerships. As a firm, we recognize the importance of remaining holistic and dynamic in our strategic planning and are therefore conducting our own materiality assessment in 2022.
Below, we outline five steps a private company can take to develop their own ESG materiality assessment and share our views on a few best practices to consider. These steps may seem daunting at first, but they are solely intended to serve as a guide. We recognize that every private company is at its own stage of addressing ESG materiality. Earlier stage companies may be short on time or resources and should not be deterred by the full-scale assessment outlined below. We believe this guidance can be pared down to simply interviewing your key stakeholders to help identify your main ESG issues and guide the intention of your ESG strategy. Some companies choose to engage third-party vendors to assist in their data collection and analysis to enable a more robust exercise, increased transparency, reduced workload, and independent viewpoints. However, we believe you can also do this exercise on your own and we are here to help throughout the process.
We believe materiality assessments will become increasingly critical to private companies, especially as they approach the public markets. We therefore seek to partner with our portfolio companies to assist in these assessments early, and thereby aim to enhance opportunities for sustainable growth and to reduce ESG risks.
For example, as part of our investment in a portfolio company, we offer support in this process including:
ESG in private markets: Insights for 2023Continue reading
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ESG in private markets: Insights for 2023
We highlight five key areas for private companies to prioritize in 2023 and share the essential steps they can take to keep up with today’s evolving ESG risks and opportunities.
Fintech market overview: The intersection of disruption and dispersion
In the latest episode of WellSaid, Portfolio Manager Matt Lipton and Global Industry Analyst Matt Ross join host Thomas Mucha to discuss their outlook for fintech in today's environment, exploring the recent pullback in the sector, disruptive fintech innovations, potential regulation, and much more.
In a new era for interest rates, can hedge funds fill the role of fixed income?
Hedge funds could be valuable building blocks for a fixed income substitute portfolio, but how should the portfolio be constructed? Members of our Fundamental Factor Team share their views.
Macro renaissance: The opportunity ahead for investors
As the global economy and financial markets transition to a new, potentially more volatile era, macro investment strategies may be well positioned to take advantage of market dislocations and greater asset price differentiation.
Measuring impact in venture capital
We highlight why venture capital matters to impact investors and how to authentically measure and manage impact in this asset class.