A growing number of investors and founders are partnering with private equity firms that integrate environmental, social and governance (ESG) considerations into their business models and brands. In fact, there has been such an increasing reliance on ESG data to inform investment decisions that 93% of limited partners (LPs) would walk away from an investment opportunity if it posed an ESG concern.
So, what exactly constitutes an ESG concern? The most common offender is when companies offer limited or no visibility into how their business impacts its employees and the communities in which it operates. More often than not, this lack of transparency isn’t because companies have something to hide, but because they just haven’t assembled the communication materials necessary to share their ESG data. That said, it’s important to know that investors may still overlook your firm if you’re unable to provide private equity ESG information, which underscores the importance of incorporating ESG messaging into your overall marketing strategy.
What is ESG in Private Equity?
Within the private equity space, ESG is the environmental, social and governance standards that investors use to evaluate potential investments in private equity firms and their portfolio companies. Investors use ESG data the same way they use other business benchmarks, such as EBITDA, profit margins and loss statements. Taken together, these elements determine how well a company is positioned for growth, investments or acquisition.
ESG data is important to investors because it provides valuable insights into how companies are running their operations, mitigating risk and generating value. Afterall, revenue and profit aren’t the only indicators of sustainable business growth. For example, a company that violates environmental laws, uses poor governance practices or has unsafe worker conditions may be profitable as a business—but that certainly doesn’t mean it’s a good investment. Companies can quickly go downhill if they face regulatory consequences or if they develop a poor reputation in the eyes of consumers.
Good ESG practices not only help companies mitigate business risks related to climate change, human rights and policy, but they also make them more resilient to unforeseen events and societal changes. An Accenture report found that companies with consistently high ESG performance are more resilient—resulting in them scoring 2.6 times higher on total shareholder returns and enjoying 4.7 times higher operating margins than companies with medium ESG performance.
When private equity firms and their portfolio companies incorporate good ESG practices into their business approaches, they also invite opportunities for more value creation. Benefits of ESG in private equity include more satisfied employees, favorable press and analyst coverage and, of course, contributing to a healthier and more equitable planet.
Notably, a recent SHRM survey revealed that 75% of U.S. executives believe ESG initiatives have a positive impact on employee engagement, 60% said ESG positively impacts retention, and 64% said ESG positively impacts recruitment.
How Your Private Equity Firm Can Embrace ESG Marketing in a Practical Way
Incorporating ESG into your firm’s brand strategy doesn’t mean you need to onboard hippies and start serving kombucha at company meetings. In fact, it’s best to stay true to your brand and avoid polarizing extremes. Frame your firm’s ESG considerations in a non-political, dollars-and-sense context. In other words, your messaging should communicate how adopting good ESG practices positively impacts the bottom line by increasing revenue and mitigating risk.
Here are a few examples of how to incorporate ESG themes into your firm’s marketing strategy:
1. Be Transparent About Your Due Diligence Process
Your website and investor communications must include transparent information about your due diligence process. In a detailed report or video, share how your firm collects ESG data and assesses its potential portfolio companies' environmental risks and liabilities.
Similarly, private equity marketers should encourage their portfolio companies to achieve ESG transparency by helping them assemble their own ESG reports that clearly disclose key metrics such as carbon emissions, water usage, waste generation, philanthropic contributions, diversity and inclusion efforts, ethical leadership and fair labor practices.
2. Showcase Your Investment in Socially Responsible Companies
If your firm prioritizes sustainable or social impact investing, capitalize on that in your ESG messaging. Look within your portfolio for companies that are committed to creating a positive environmental impact, such as those that are developing green technologies or contributing to social well-being. This may involve industries like renewable energy, healthcare and education. By highlighting companies that champion ESG in your marketing materials, you’re making it clear that your firm values partners who are committed to contributing to a better world.
If you’ve helped your portfolio companies meaningfully transform their ESG practices, publish case studies that demonstrate why—and how—you’ve made impactful operational changes. Be sure to also evaluate the social impact of your firm’s exit strategies.
When you announce an exit, for instance, share how the welfare of employees, local communities and other stakeholders was considered. Sharing the joint missions of your firm and its portfolio companies communicates that profit is not the only consideration that LPs and founders should weigh when evaluating a potential partnership with your firm.
3. Communicate in Layman’s Terms
ESG investing is full of specialized language that may be overwhelming for the average reader. You may initially measure ESG impact with metrics like how many tons of CO2 emissions were released, how many gallons of water were used throughout a supply chain, or how many dollars were donated to charitable causes.
To help these numbers resonate with your audience, translate your ESG data into charts, infographics or comparisons so the impact of your efforts can be more easily understood. The human brain processes images 60,000 times faster than text, and 90% of the information transmitted to the brain is visual—indicating it’s in your best interest to communicate your ESG metrics visually.
Seeing a noticeable downtrend on a graph depicting CO2 emissions, for example, is much more poignant than just reading numbers in a paragraph. Or, rather than simply stating how much money was donated to a charitable organization, draw a comparison to demonstrate the impact of that donation, such as saying, “We donated $10,000 to educational charities, which is enough to provide a backpack full of school supplies to 500 underprivileged students.” Then, use graphics to illustrate what 500 backpacks for 500 students actually looks like.
4. Promote ESG Certifications & Partnerships
Some of your firm’s executives may have earned qualifications, such as a certified financial analyst ESG certificate, that uniquely equip them with the necessary skills to make smart investment decisions based on ESG considerations. Or perhaps you partner with consultancies that specialize in sustainability and social impact to help your portfolio companies improve their ESG metrics. Be sure to mention these ESG certifications and partnerships on your firm’s website and marketing materials, as they strongly validate your firm’s commitment to responsible investing.
5. Be Outspoken About ESG
As your firm becomes more experienced with ESG investing, be transparent about the journey. Encourage your firm’s executives to publish thought leadership articles or social media posts about why they’re prioritizing ESG, the steps they’re taking to improve the ESG efforts of their portfolio companies, and maybe even some of the mistakes they’ve made along the way.
Founders and LPs appreciate this kind of transparency, and it demonstrates that your firm is striving to make positive changes despite being a work in progress. Regularly publishing ESG-related content could also help your firm earn speaking engagements or press opportunities, further positioning it as an industry leader in ESG investing.
Promoting Your ESG Private Equity Outcomes
Gathering ESG data across all of your portfolio companies, analyzing the total impact of your firm, and packaging it as a compelling narrative to share with LPs is a time-consuming project. ESG marketing may have been an afterthought in previous years, but it must now be prioritized in your marketing strategy in order to reach and resonate with LPs. Completing your ESG disclosure must also be a collaborative effort between your firm’s marketing team, leadership, portfolio companies and possibly even your legal advisors.
Companies typically share their ESG messaging on a designated webpage or in a comprehensive ESG report that can be leveraged during discussions with socially conscious investors. However, you can extend the reach of your ESG messaging by peppering it into your emails, digital ads, social media and press interviews. If you’re particularly proud of your firm’s ESG metrics, you may even want to create a full campaign around it to position your firm as a leader.
Incorporating ESG into your private equity marketing is a long-term strategy for positioning your firm as a well-rounded organization that strives to provide value to its stakeholders, while creating a positive impact on your community and the planet. But being transparent about your core values and operations requires an ongoing marketing effort rather than a one-time commitment. By following the best practices outlined in this article, your private equity firm can keep up with evolving investor expectations and deepen trust with employees, partners and the public.