Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish

Asking private companies to show their ESG credentials

ESG issues are a growing area of focus in the public market, but what about the private market? Our co-head of Private Investments and our director of ESG, Private Investments, argue for informed and active ownership from the initial investment until the IPO.

Views expressed are those of the author and are subject to change. 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. Any forward-looking estimates or statements are subject to change and actual results may vary. For professional or institutional investors only.

Michael Carmen, co-head of Private Investments, and Hillary Flynn, director of ESG, Private Investments, discussed the role of ESG research in private equity investing, including in portfolio due diligence and engagement with private companies as they map their path to the public market.

Where do you see the intersection of ESG analysis and private equity investing?

Michael: In the private market, our analysis is typically focused on three things: a company’s management team; its business model, competitive positioning, and products; and its viability as a public company. ESG issues can directly affect a company’s business model and therefore its viability, so we believe it is essential to engage with management to assess ESG-related risks. We have passed on deals where transparency on these risks has not been adequate to evaluate the long-term growth potential of a company.

In addition to requiring transparency during due diligence, we think we are in a position to help guide the way a private company addresses ESG risks and opportunities. In the private market, company management teams often look to our firm as a thought partner for insight on issues that may affect a company’s future competitiveness. This often includes the most material ESG issues, even if they are not labeled as such.

In short, this is not about screening deals based on values alignment. It’s about having a more holistic due diligence process and it’s about being a partner to help guide private companies so they can be better received by the public market when the time comes.

How are you addressing the need for ESG analysis along these dimensions?

Michael: We are leveraging Wellington’s extensive ESG capabilities, including our 12-member ESG Research Team. Importantly, we are also adding resources that specifically serve our private-market investors. Case in point, Hillary recently joined our privates team in the newly created role of director of ESG, Private Investments. She joined Wellington in 2002 and has spent the majority of her career working on the firm’s ESG research, with a specialty in global consumer and health care companies. She has extensive experience assessing issues such as climate change, supply-chain management, and executive compensation.

Hillary, can you provide some perspective on how Wellington has approached ESG research and how that will carry over to private equity with your guidance?

Hillary: Our portfolio management and ESG Research teams view ESG analysis and integration as potentially return enhancing and risk mitigating. Each of our portfolio management teams develops its own investment approach, integrating ESG considerations into research and decision-making processes to the extent that they believe these issues may affect the long-term success of a company and investment returns.

Wellington’s ESG Research Team resides within the broad investment research resources of the firm and brings in-depth ESG expertise to the investment dialogue. The team produces ESG company research and ratings, conducts ESG portfolio reviews with investment teams, and engages with companies on ESG issues for the benefit of our clients. To give some sense of the scale of this work, in 2019, the ESG Research Team engaged with the management teams of 407 portfolio companies from 29 countries around the world — on topics ranging from carbon emissions to cybersecurity to executive compensation.

Over the past decade, ESG has become an increasingly important part of the investment process across our industry and in all asset classes, and I believe private equity is no exception. My goal as a member of our Private Investments Team is to help ensure that it happens in a formal, systematic way.

Can you give some examples of how you will apply the firm’s ESG capabilities within private markets?

Hillary: Sure, there are a variety of ways we think ESG can be incorporated into private-market investment and ongoing oversight processes. For example, Michael mentioned the importance of management teams in the private market. During the due diligence process, we may meet with the company’s key stakeholders, including employees and customers, to get a better sense of how the management team operates and whether the company is being thoughtful about things like talent retention, which can be integral to a private company’s future success, and corporate governance, which can impact the success of a private company’s exit strategy. For portfolio companies considering an IPO, we may encourage management to implement governance practices that public-market investors expect, such as issuing a single share class and improving board composition and independence.

We can also use our ESG lens to help identify risks specific to certain industries. Financial technology companies, for example, manage large volumes of confidential personal information, and a data breach can damage a company’s financials and its reputation. We can focus our research on the adequacy of data privacy and security programs. Or take consumer companies, where key ESG risks often lie within the supply chain, particularly when products are being sold directly to consumers. The quality and responsible sourcing of raw materials, labor management practices in factories, and the safety of the end product are all important to a company’s reputation and customer loyalty. Since customer retention is central to the long-term potential of a company’s products, balancing cost with quality may be part of an investment team’s ongoing dialogue with company management.

Learn more about Wellington Management’s approach to ESG engagement.


Please refer to the investment risks  page for information about each of the following risks:

  • Capital risk
  • Liquidity risk
  • Manager risk

 

Please see the important disclosure page  for more information.

Our approach to sustainable investing

RECOMMENDED FOR YOU

Climate conundrum: Will carbon constraints affect the pursuit of other portfolio objectives?
Members of our Fundamental Factor Team share their research on the potential for trade-offs when carbon goals are integrated into outcome-oriented, factor-based portfolios.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
October 2021
Climate conundrum: Will carbon constraints affect the pursuit of other portfolio objectives?
,
publish
Countering climate risks through collaboration
Global Industry Analyst Alan Hsu and Dr. Philip Duffy of Woodwell Climate Research Center discuss the importance of close cooperation between investors and climate scientists when addressing climate action.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
October 2021
Countering climate risks through collaboration
,
publish
Tech WELLcovered: Experience transformed
5G, AI, and augmented reality will soon offer exponentially more options for experiences outside of work — with each activity personalized for your interests. Join us on a journey to witness the past, experience the present, and transform the way you see the future of fun and the investable opportunities it creates.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
October 2021
Tech WELLcovered: Experience transformed
,
publish
<span>Multi-Asset Outlook — </span>With growth and policy, which matters more: Level or change?
While macro risks may be elevated somewhat, Nanette Abuhoff Jacobson and Daniel Cook still see opportunities, including in European equities and commodities. They also argue for being selective in credit while maintaining fixed income for diversification.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
October 2021
Multi-Asset Outlook — With growth and policy, which matters more: Level or change?
,
publish
<p style="font-size: 13px; margin:7px 0;">FUTURE THEMES | SOCIETY</p>The future of retirement: Aging in 2050
We explore the long-term investment trends associated with global aging through the story of Fang, a fictional Chinese retiree living in 2050.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
September 2021

FUTURE THEMES | SOCIETY

The future of retirement: Aging in 2050
,
publish
Investing in innovation: Disruption is everywhere
We outline our definition of innovation and answer questions about our views on the breadth and depth of the innovation opportunity, how we identify and compare disruptive companies across industries, and the importance of robust research capabilities — including a private-equity mindset and strong ESG expertise.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
September 2021
Investing in innovation: Disruption is everywhere
,
publish
Tech WELLcovered: Work reimagined
We believe today's workplace innovations are just the beginning of a multi-decade transformation. Join us on a journey to witness the past, experience the present, and reimagine how the future of work is creating investable opportunities.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
September 2021
Tech WELLcovered: Work reimagined
,
publish
Adapting to climate change: Investing in the resiliency imperative
As the risks of climate change increase, so does the need to build resiliency. Members of our Climate Research Team discuss why they believe demand for climate adaptation solutions could grow exponentially, and how they think about investing in solutions for a range of climate variables, including heat, flooding, wildfires, and water scarcity.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
September 2021
Adapting to climate change: Investing in the resiliency imperative
,
publish
Chris Goolgasian
 CFA, CPA, CAIA
Erika Murphy
 CFA, CAIA