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ESG insights for private companies —
The critical role of ESG in private equity

We explore why we think ESG factors will become increasingly critical to private companies, especially as they approach the public markets.

 

The views expressed are those of the authors 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. 

Today, when a private company goes public, there’s much greater scrutiny on the firm’s ESG practices than ever before. In our view, the earlier boards and management teams start to think about and act on these topics, the better.

We believe that 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 becoming more common for consumers to reward companies with strong ESG practices. There is also a growing recognition that a company’s ESG profile can affect its culture, regulatory/reputational risk, employee productivity, and ability to attract and retain top talent.
  • Draw a broader pool of investors post-IPO. Asset owners and institutional money managers are increasingly focused on ESG. Companies should expect to be held to higher governance standards, including by ESG rating agencies and proxy advisors.
  • 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 increasingly be highlighted in proxy contests.

Partnering with Wellington

We can help private company management teams and boards navigate the complex and constantly evolving ESG landscape by sharing our experience and perspective, especially as they prepare for an IPO. Our goal is to be a thought partner to private companies — not the ESG police. We hope to establish a productive two-way dialogue and draw on our firm’s broad public and private equity, fixed income, and ESG expertise to offer companies an informed, long-term view and provide valuable market and company-specific input.

We have a vested interest in sharing insights that will help set up our portfolio companies for long-term success (far beyond the IPO). After all, as active managers, we are investors by choice — so we believe our interests are aligned with those of our portfolio companies. As an ESG partner to portfolio companies, we can assist by:

  • Offering feedback on both board composition and the evolving expectations on shareholder-rights best practices
  • Sharing our framework for compensation analysis and benchmarking
  • Providing additional ESG insights including materiality assessments, prioritization, and data aggregation

Bottom line

We believe these factors will become increasingly critical to private companies, especially as they approach the public markets. We therefore seek to partner with our portfolio companies to integrate ESG best practices into their business models early, and thereby enhance opportunities and reduce risks.


Appendix A: Additional ESG resources

Please see a short list of resources below. For a more comprehensive list of ESG resources, or for any further questions, please contact us.

  • Sustainability Accounting Standards Board (SASB) – Industry-specific market standards to help companies identify, manage, and report on sustainability topics that matter most to investors.
  • Task Force on Climate-related Financial Disclosures (TCFD) – A task force formed by the Financial Stability Board (FSB) to develop voluntary and consistent climate-related financial risk disclosures for use by companies to provide information to investors, lenders, insurers, and other stakeholders.
  • Global Reporting Initiative (GRI) – A sustainability reporting standard to help businesses understand and communicate their impact on ESG issues such as climate change, human rights, and corruption.
  • Principles for Responsible Investment (PRI) – An international network of investors committed to six aspirational principles related to integrating ESG into the investment process.

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