A Force for Change: Limited Partners Want Top Executives Who Believe in ESG

At a glance

• Main takeaway: Over the last two years, many limited partners are using ESG metrics as a deciding factor when it comes to their investments.
• Invest with confidence: Limited partners are demanding full transparency when it comes to ESG, specifically on initiatives that strengthen diversity, equity and inclusion, and climate-related issues.
• Next steps: Aprio’s ESG team can provide support to help you get your ESG initiatives off the ground.

Are you ready to build your social balance sheet? Contact our team for a free consultation.

The full story:

The pandemic set off a catalyst for corporate America to realign their values and goals to meet the needs of their employees and customers. Millennials and gen z have been the key players in this drive for change. These two generations have come together to light a not-so-subtle fire under larger institutions demanding transparency on their environmental, social and governance (ESG) initiatives, specifically the environmental and social components.  

Over the last two years, the conversation around ESG has become mainstream, and firms that weren’t prioritizing ESG are now moving in that direction. The Institutional Limited Partners Association (ILPA) established a standard framework that allows limited partners to evaluate the ESG integration of funds that they are considering investing in at various stages in the lifecycle. This detailed resource serves as a jumping off point for funds and companies to create best practices that suit the needs of their organizations in the present and future.

It should come as no surprise that corporate America has a diversity problem

Since the beginning of the pandemic, heightened social expectations have spotlighted flaws in society and corporate America. Consumers, investors and the public at-large have demanded a closer look into the diversity, equity and inclusion (DEI) policies of some of the biggest institutions and companies in the world. DEI is centered around fostering diversity and pursuing social justice, both of which now play a significant role in the success of a company and economic growth.

From an investment and risk management perspective, it’s crucial for every business to have a solid DEI framework in place that provides measurable short- and long-term goals and covers everything from a DEI code of conduct and recruitment policies to promoting an inclusive culture and investing in your employees.

A one-size-fits-all solution for climate change does not exist

There has been an uptick in conversation on how companies are measuring their carbon footprint from greenhouse gases to carbon emissions. For example, when you book a flight online, the airline’s website will tell you what the carbon consumption is for your ticket. Now, for the average person that may be just food for thought. However, if you are traveling for business, your firm can capture those metrics and use them to determine the overall impact that a single trip had on the company’s ESG initiatives.

While every company likes to proclaim they are doing their part to “go green,” climate impact is an increasing consideration for limited partners in investment decisions. Despite there being no standard structure to implement, assess and manage environmental initiatives, limited partners continue to put pressure on their general partner private equity, venture capital and real estate firms to develop concrete plans with their portfolio companies to address climate risks.

Linking executive compensation to ESG

Limited partners know the true value behind ESG and want to see real progress on integration throughout the portfolios of their general partner private equity, venture capital and real estate funds. So, general partners have begun tying compensation of top executives to take an active approach to use ESG as a force for change and value creation.

Most top executives are achievement driven. So, by incentivizing ESG, general partners are making it personal to drive environmental and social goals.

The bottom line

General partners will continue to test and push top executives in an effort to bring about real ESG change through the integration of diversity, equity and inclusion and climate-focused initiatives because their investors, i.e., limited partners, have prioritized this as a key consideration for deciding which funds they will invest with. For funds, portfolio companies and companies considering a transaction in the future, Aprio’s ESG team can be your resource and provide support to help you identify achievable ESG initiatives. Stay tuned for the second part of our series from ESG organization to action where we will discuss ESG activism in the public market.

Are you ready to build your social balance sheet? Contact our team for a free consultation.

Related resources

• The Growth of Impact Investing: From Pension Funds to Endowments Divesting Fossil Fuel Assets
• Aligning Incentives to Drive ESG Strategies and Satisfy Investors
• About Aprio’s ESG Practice