ImpactAlpha, Oct. 17 – Politicians, or rather, ex-pols, were on the hustings last week with seemingly opposite advice for executives and investors trying to navigate the suddenly contentious terrain of ESG.
But the range of messaging strategies aside, almost no one disagrees that managing a corporation’s environmental, social and governance risks – and impacts – is essential to long-term success, or even survival.
As an unfamiliar term, ESG has become a flashpoint in the culture wars, at least until next month’s midterm elections in the not-so-United States.
Former congressman, and Speaker of the House Paul Ryan made the rounds in New York advising corporate leaders to keep their heads down lest they get tangled in fights like the one Disney got into with Gov. Ron DeSantis when it voiced opposition to Florida’s “Don’t Say Gay” law last spring. That’s especially true if Republicans win a majority in the House of Representatives.
“The next shoe to drop is to go after woke corporations,” Ryan said at the Robin Hood Investors conference last week. “Ryan said he’s advising CEOs not to focus on ESG too much,” tweeted Semafor’s Bradley Saacks about the closed-door gathering.
DeSantis’ fight with Disney was “really good for him, from a political perspective,” Ryan said. As the GOP lays plans, representatives vying for leadership posts are being pressed by the American Conservative Union to pledge they won’t meet with “woke corporations like Walmart,” he told the investor gathering (ImpactAlpha can confirm the gist of Ryan’s comments from a separate event last week).
Impact edge
In a separate gathering of impact investors, another ex-elected official said to look past the campaign heat to fundamental drivers of growth and performance. “The attack on ESG is noise,” former Massachusetts Gov. Deval Patrick told ImpactAlpha on the sidelines of the Global Impact Investing Network’s investor forum in The Hague.
Rather than progressive politics, investors are acting on secular trends driven by choices people are making about what to eat and what to wear and what to drive. “That’s not turning back. That is where the economy is moving.”
Patrick, who launched Bain Double Impact’s $390 million first fund in 2017 before leaving to mount a short-lived presidential campaign in 2019, has returned as a senior advisor. Bain Double Impact raised a second, $800 million fund in 2020.
Companies need not comment on every public issue, Patrick said. “But the idea of paying attention to what your impact is, the effect your business has on all stakeholders, not just the shareholders, is not a radical new idea,” he said. “If anything, it’s an old fashioned idea.”
“ESG is table stakes,” he said. “Impact is the laboratory, it’s the edge.” That edge comes from delivering value from social or environmental impact. “If you want to make money, you better go there, because that’s where the growth opportunities will come from and where the growth has been coming from.”
ESG dividend
Venture capitalists and corporate executives so far don’t seem cowed by the politicization of ESG, though there are signs that some messaging bullet points are being revised. VCs are embracing environmental, social and governance practices to strengthen their portfolios. More than three-quarters of VCs claim to have fully or partly adopted sustainable principles, according to PitchBook’s “Sustainable Investment Survey.”
“Good VCs are increasingly aware of both the monetary benefits and the intangible optics of paying attention to ESG,” Mike Packer of $4.8 billion fintech venture firm QED Investors wrote in an ImpactAlpha op-ed.
Companies that place a significant emphasis on achieving high environmental, social and governance standards are reaping dividends worth trillions of dollars according to a new survey by Moore Global, a network of consultants and advisory firms.
The study, based on a survey of more than 1,250 executives in the U.S., Australia and Europe, found firms that professed a keen focus on ESG had more than twice the revenue growth than those with lower commitment to ESG standards. Profits were up by 9%, compared to 3.7% growth for companies less committed to ESG standards.
Impact opportunities
One outcome of the buzzword battle over ESG has been the drawing of a crisper distinction between ESG, primarily a framework for analyzing risks to business operations or portfolio holdings, and impact, an outcomes-driven investment approach.
For the latter, an increasingly common metric is the percentage of revenues a company generates from activities that measurably contribute to defined goals, such as the Sustainable Development Goals.
“You can be a comprehensive and effective user of ESG analysis and never call yourself an impact investor,” says Spectrum Impact’s Rehana Nathoo. “And you can be an impact investor and fail to use ESG analysis in your processes and systems.”
The deeper we understand this, she writes in a guest post on ImpactAlpha, “the easier it’ll be to create a set of tools and frameworks that everyone can use – regardless of where they are in their impact journey.”
Nathoo will join Ander Iruretagoyena from Impact Engine, Yusuf George from Engine No. 1 and Jessica Matthews from J.P. Morgan for “Greenwashers Beware: Using ESG for Good, not for Evil,” at this week’s SOCAP conference in San Francisco.
Stay calm and do a macro analysis of risks and opportunities, agreed Sorenson Impact’s Jeremy Keele in a panel at the GIIN conference.
“Ignore the rhetoric a little bit on ESG,” Keele said. “It’s kind of a little fever and sort of let it burn itself out, and not give it too much airtime or play.”
Instead, focus on the opportunities for impact, he says. Such opportunities are abundant in intentional, measurable impact tied to a business’s core products and services, he said.
“Tell those stories,” Keele counseled. “Be transparent about different return and impact objectives and considerations, and be transparent on both.”
ImpactAlpha’s Amy Cortese and Dan Keeler contributed reporting.
