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Bringing ESG strategies to private markets to boost value and impact

ImpactAlpha, Aug. 10Public market investors increasingly are deploying ESG, or environmental, social and governance, investing strategies to manage risks and opportunities in company operations. Private-market impact investing puts the focus on outcomes, or how the company’s products and services deliver education, healthcare, financial access and other social or environmental goals.

By integrating ESG and impact, argue Jessica Droste Yagan and Priya Parrish of Chicago-based venture firm Impact Engine, investors can boost impact and improve returns.

“A great ESG strategy will take into account the impacts of the products that are being sold,” write Yagan and Parrish. “Likewise, an effective impact investing strategy will take into account that a business’s impacts will go well beyond its product, especially as it scales.”

  • Value creation. In its venture strategy, Impact Engine accesses the diversity of the management team and board of directors as a risk or strength. It ensures companies address customer security and privacy, and have in place ethical practices and strong governance. In its private equity strategy, the firm identifies ESG risks and opportunities and evaluates management’s ability and willingness to make improvements throughout the investment period. “We believe our ESG management process helps ensure the total net impact of the company is positive.”
  • Private equity uptake. Traditional private-market investors are deploying ESG strategies to help portfolio companies lower costs, identify risks and connect to customers (see, “Impact signals for venture capitalists). Earlier this year, Mercatus, a private markets data platform, integrated Sustainability Accounting Standards Board, or SASB, standards to help investors analyze material ESG data across portfolios. The uptake of ESG in private markets “has been significant,” SASB’s Jeff Cohen told ImpactAlpha (Still, only about 700, or fewer than 10% of global private equity firms have signed the Principles for Responsible Investment; a much smaller fraction disclose that they receive ESG reports from their portfolio companies). Impact investing firms like Octopus and Leapfrog are dedicated to the approach, while many old-line middle market buyout funds simply realize the utility of the approach, Cohen says. “There’s growth across all.”

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