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The obligation of companies to report and discuss standards for compliance with environmental, social and management standards is, in the opinion of many specialists, of equal importance, responsibility and value for what is currently applied to their financial results. Some politicians have tried to make considerations of environmental, social and governance standards a biased issue, but it is effectively a humanitarian and global issue par excellence. Major investors claim that the abundance of forward-looking ESG proposals at the agency’s season of annual shareholder meetings this year proves that the sustainable investment movement has gone too far. In a tweet on Twitter, Tesla CEO Elon Musk recently voiced his opposition to the concept after removing the electric car maker from the S&P 500 ESG index.
Nevertheless, capital can still act as a critical lever for positive global change – but perhaps not as one might think.
In the face of any major threat, people usually turn to religion or the government for help. Today, the climate crisis is accelerating, part of Europe is at war, and the United States is deeply polarized and surrounded by escalating firearm violence. The COVID-19 pandemic is still haunting us, and advanced economies are facing the prospect of stagflation. But, as millions of people around the world suffer economically and emotionally, religion has largely lost its moral authority and practical influence, and many governments are either impotent or autocratically controlled.
Of course, the private sector cannot solve all these problems on its own. But would the world at least be a better place if companies and investors were systematically committed to environmental, social and governance standards (ESG)?
It is the flow of capital through private markets worldwide – not public exchanges – that could play a major role in the mainstream of ESG standards. In any case, we find that nine out of ten people in the corporate sector worldwide work in private companies. For every listed company, there are 200 private companies. Private companies form the core of capitalism. The main artery through which the most important companies acquire their growth sources is in private markets – especially private equity.
To be sure, private equity has traditionally not been the first thing people think of when discussing how to improve the world. But while the industry has only existed in its current form since the 1980s, today it manages more than $ 9 trillion in assets and owns many of the companies on which we depend in our daily lives. Moreover, it is about to undergo a historic transformation as the founders of many of the leading private equity firms retire, taking over a younger generation.
The league, now in its 30s and 40s, is keenly aware of the failures of Gordon Gekko-inspired baby boom investors and the limitations of Milton Friedman’s view that business leaders’ sole social responsibility is to maximize shareholder value. Fundamentally, the new wave of private equity leaders believes that capitalism can produce lasting shared wealth. They believe that achieving good financial returns requires recognition that sustainability, the environment and the dignity of workers are at the core of building permanent institutions. In fact, understanding this view forms the ideal: the belief that successful organizations create a positive, reciprocal dynamic between their owners, employees, customers, suppliers, and the communities in which they operate.
In this environment of multidimensional returns, the development of key metrics that are not financial but nonetheless physical is essential, and foundation and performance criteria are essential. Management expert Peter Drucker may never have said, “If you can’t measure it, you can’t manage it.” But that does not make it any less honest.
The choice of ESG metrics can vary depending on the region, the industry, the size of the company and the goals of the owners. But that is no reason to abandon the establishment of standards. There are many important indicators that every company can regularly measure to turn the talk of doing the right thing into reality.
For example, all companies should monitor and monitor their use of fresh water, waste generation, direct and indirect gas emissions or any of their activities causing surface logging. Other key metrics include diversity of management teams and boards, employee layoffs, work-related injuries and data breaches.
There is no one-size-fits-all approach to collecting ESG data, but there is a bottom line that fits everyone. We commend the work of the ESG Data Convergence Initiative to develop core reporting metrics, as well as the efforts of the International Sustainability Standards Board to modernize and globalize industry-based standards.
This information should now be subject to tracking. Worldwide, there are more than 8,000 investment companies operating in private markets, the vast majority of which have not yet adopted ESG standards. This situation needs to change. Regulators will soon be demanding it, as rules and standards such as the Sustainable Finance Disclosure Regulations and those recommended by the Climate Financial Disclosure Task Force come into effect. Investors will demand it too – and it’s already happening, as the rise in climate – related proposals shows this year’s agency season. Society needs investors to pay more attention to environmental, social and governance factors in the face of increasing social tensions and unprecedented environmental instability. Simply put, we need to move from the “trust me” mentality to the “show me” mentality.
Nearly 90 years ago in the United States, Congress created the Securities and Exchange Commission and the accounting industry established AARP. Today, companies whose financial disclosure has been patchy and patchy begin to report regularly and transparently. In contrast, the capital markets were strengthened thanks to the broader participation of investors and the emergence of shareholder democracy.
We must now do the same with ESG compliance reports. The path to this goal can be led by a new generation of private market players.
* Co-founder and managing partner of Px3 Partners.
** Former CFO of the Bill & Melinda Gates Foundation, co-founder and CEO of Novata.