Private companies: The road to ESG
ESG reporting became mainstream for listed companies. According to a G&A Institute research, 92% of S&P 500® Companies and 70% of Russell 1000® Companies Published Sustainability Reports in 2020. In Europe the figure is even higher. And Asia is catching up fast. The question is not anymore if companies should report but more on how to standardize the ESG landscape to make it transparent and comparable across the world.
And guess what? Exactly the same process is happening for private companies. There are 4 forces shaping the ESG stream for private companies:
- Snowball effect
1/ Snowball effect
In today's globalized world, listed and unlisted companies are part of the same supply chain. ESG compliance is particularly important for suppliers to large (publicly traded) companies, as they can insist that all suppliers ensure (and demonstrate) that their supply chain is ESG compliant. Obviously, the cascading of ESG practices from the bigger listed companies to smaller (non-listed) suppliers is already taking place and will only accelerate.
The snowball effect will as well come from consumers’ behaviors. For private companies selling directly to consumers, the pressure on (documented and transparent) sustainability is already growing.
It has to be expected that other stakeholders (Local Communities, NGOs, Employees) will only contribute to accelerate the speed and size of the ESG snowball.
Widely acknowledging the climate urgency and its link to ESG practices, leaded by the EU and spreading fast all over the world, new sets of national and international regulations are paving the ESG way for private companies.
It is foreseen that by 2023, EU ESG regulations such as the Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy Regulation will impact private companies that exceed at least two of the following three criteria:
Balance sheet total: EUR 20 million;
Net turnover: EUR 40 million;
Average number of employees during the financial year: above 250.
These changes are expected to at least quadruple the scope of reporting requirements and cover some 45,000 companies (current rules apply to about 11,000) and their scope is supposed to be expanding to include all small and medium-sized enterprises (SMEs) by 2026.
Switzerland is as well expected to implement its Responsible Business Initiative Counter Proposal aligned with the EU criteria.
Similarly, UK “large” companies are expected to comply with Taskforce on Climate-relate Financial Disclosures (TCFD) by 2022.
As a matter of fact, the regulation landscape will inevitably be enlarged, rather soon than late.
Most Private Equity firms already include ESG as a non-financial risk to review investment decisions. A survey done by Institutional Limited Partners Association (ILPA) in partnership with Bain & Company* confirms that for more than two-thirds of respondents ESG considerations play a part in organizational investment policies. Around 85% include at least some ESG initiatives, with more than half having fully implemented ESG-specific policies.
What does that mean? In short, access to funding (for growth, projects, investments) will be tied to ESG performance. And this has to be expected not only from Private Equity Investors, but as well from the vast majority of financial actors, from big pension funds down to local banks.
The word survival may appear exaggerated, but it is not. We are living in a vulnerable and uncertain world. Day after day, the probabilities for pandemics, climate disasters, shortages in supply chains or social disruptions are increasing. A focus on ESG helps preparing risk mitigation. In this respect, using ESG as a long-term competitiveness strategy for value creation is key.
It is also a matter of adaptation to the evolving world.
The theory of evolution has taught us that "It is not the strongest of the species that survive, nor the most intelligent, but the one more responsive to change" (Charles Darwin).
In tomorrow’s world, the leading (private) companies will be the ones that were fast enough to adapt to the ESG snowball & regulations, securing their investments and integrating ESG in their strategy to create value for customers, employees, communities and our planet.