ESG as moral arete, acronym for good governance or virtue signaling

ESG or 'GSE' (not to be confused with government sponsored enterprise); Eurazeo chief warns industry progress is a 'disgrace' in some ESG areas.

There are a lot of different ways to frame the environmental, social and governance debate. 1) You need to do it because otherwise you won’t be able to attract top talent from younger generations, who hold ESG concepts as highly important. 2) You need to do it because PE has a bad rap, and it’s only another headline or two away from being ripped apart, its limbs displayed on pikes at the corners of capitalism. 3) You shouldn’t do it unless LPs want it, or unless it provides measurable value, (ie, higher returns). 4) You should do it because they do, and it does. 5) It is the right thing to do, per se. 6) It is the right thing to do, not per se, but because it actually is just good business, in the way having a robust compliance department is a cost of good business.

And on.

At the CFOs & COOs Forum in late January, I noted at a lunch with two PE pros, that one held that ESG is, unfortunately, as yet an unjustifiable cost that provides ill-defined benefits (or that’s what I took him to say). Indeed, his firm felt the need to come out with an ESG policy – they’re so hot right now! – but the policy was essentially “that we don’t have one.”

The other PE-er said his fund focuses solely on ESG because it’s the “right thing to do.”

So, the spectrum is pretty broad in PE. ESG not the kind of thing where there is generally a first-mover advantage – a fair share of early green-bond issuers have come under fire for ‘greenwashing’, or the ESG equivalent of hypocritical virtue signaling. More will come: if you aren’t particularly careful about ensuring that your firm doesn’t have investments in one fund or division that contradict the ESG principles of another fund or division, you’ll probably get roundly criticized at some point.

Anyway, today we have two articles on this debate. The first, linked above, is a rundown of some of the ESG themes I heard debated and discussed at the Forum (where I moderated a panel on ESG). At least two people said their successes in ESG have rested on convincing their respective firms and investors that it’s the ‘governance’ part of ESG that PE should focus on first.

The second comes from PEI‘s Carmela Mendoza, who attended the IPEM 2020 conference in Cannes, France last week. There, Eurazeo CEO Virginie Morgon warned that PE has taken the chimerically meritorious and dangerous position banking once had at the apex of financial, and thus economic, world order. The need, she argues, for meaningful ESG principles in PE with demonstrable results is all the more pressing, she said, and the progress made thus far in some areas is nothing short of “a disgrace.”

Maybe not so ironically, where she sees PE as subject to the most imminent threat of public outrage is the US market, where ESG generally tends more toward the “our policy is that we don’t have one.”

Email prepared by Graham Bippart