Academics and private equity investors claim to have proven that ESG considerations “can drive measurable value creation” at portfolio companies.
Research published this week by Stanford University’s Long Term Investment Initiative, with input from C$295bn Canadian pension investor BCI, shows how the integration of ESG factors into investments can improve earnings quality, reduce operational risk and increase enterprise value.
The paper centres on three anonymised case studies, all in BCI’s private equity portfolio.
The first is a logistics and transportation company with a social commitment to make its drivers’ working conditions better, by paying them based on the revenue potential of their load instead of the number of miles they drive.
The programme, in turn, incentivised drivers to take quicker routes and to prioritise loads that had a higher value to the company.
“Thanks to this compensation model, the company has reduced annualised driver turnover to the mid-60% range,” noted the researchers, adding that this is “well below” the industry average of 90%.
Recruiting and training a new driver is estimated to cost $15,000, and the analysis claims that, on that basis, the company has avoided $18m in annual cost.
The ‘driver first’ programme has also reduced accidents and injuries among employees, resulting in lower insurance premiums and consequent savings of around $12m per year.
The second case study looks at a company in the industrial manufacturing sector, which improved its environmental health and safety performance and moved into the alternative energy space.
According to the analysis, the two decisions contributed $36m to business value, and $159m to ultimate enterprise value, by decreasing financial risks and opening up new markets.
The third case study shows similar financial benefits to a specialist insurance broker, which considered ESG when looking for new business opportunities.
Writing about the launch of the research on LinkedIn, Evan Gordon Greenfield, the head of ESG within BCI’s private equity arm, said the findings demonstrated that “when treated as a financially-material operating discipline [ESG] can drive measurable value creation in private equity”.
“The takeaway is simple: ESG does not create value because it is ethical. It creates value when it is embedded in investment judgements, operating discipline and value-creation strategy,” he wrote.
Last July, a study from Bain & Company, New York University and the Principles for Responsible Investment found that sustainability had increased the revenue growth of some portfolio companies by up to 6%.
