60 Seconds With Sixpoint: Don’t Check the ESG Box

The past few weeks and months have been among the most difficult in our history. The economic uncertainties brought about quarantine coupled with recent calls for social justice have raised awareness around the topic of ESG within the private equity industry.

Historically, the topic of diversity and inclusion was viewed through an investment lens; LPs would inquire about a manager’s ESG policy with a greater focus on whether the sponsor had an ESG policy in place as opposed to how that policy was being implemented. The topic of diversity and inclusion rarely came up; and within the broader ESG framework, environmental and governance issues received greater attention. For some LPs, it was really just a box-checking exercise.

Recently however, LPs have undertaken a more aggressive and proactive approach to ESG monitoring. We are seeing real, tangible changes in their diligence, monitoring and review process especially in the past few weeks. Going forward, we expect ESG broadly and diversity and inclusion more specifically to play a greater role in the investment decision process. We expect LPs to push for change both at the firm and the fund level which presents an opportunity for GPs to “do well by doing good.” In other words, introducing and fostering a more inclusive and diverse work environment will not only benefit your overall culture and performance – but it will more closely align with what your mission driven LPs are demanding. We recommend sponsors consider three levels of review:

1. Changes at the firm level generally point to a more diverse and inclusive investment team. LPs will increasingly look to understand what policies and practices you have instituted to hire and develop diverse talent, ensure equal pay and equal promotion. Consistency of focus is equally important and LPs may want to speak to the sub-committee or partner responsible for on-going implementation of D&I practices at the firm.

2. The next ring of change is at the fund level. Here, too, there are opportunities to foster diversity and inclusion at the portfolio company level; specifically, through initiatives at the c-suite as well as by looking through to the portfolio company employee population and associated vendors. Some firms have organized sub-committees to help share best practices across their portfolio and to ensure monitoring of the same.

3. Finally, GPs may want to evaluate their role as a corporate citizen within their local or regional community. The opportunity to “scale” your impact by cooperating with local or national organizations that align with your approach to D&I can multiply the effect of your initiatives while helping set an example for others.

The Business Roundtable recently endorsed the idea that corporate responsibility should include “all stakeholders” not just shareholders. It is possible that the same philosophy will now be adopted by the broader private equity community. We live in an environment where people want to be a part of an organization that has a sense of mission and purpose. You can’t “check the box” on either. Both require a level of self-reflection, honesty, sincerity, commitment – and consistency — to achieve.