ESG Isn’t About Compliance. It’s About Competitive Advantage.

In a world that’s quickly shifting towards stakeholder capitalism over shareholder profit, it’s no longer enough for private equity firms to simply check the boxes on ESG (Environmental, Social, and Governance) compliance. True market leaders embrace “ESG operationalization”—going beyond surface-level actions and genuinely committing to making a positive environmental and social impact. These firms don’t just view ESG commitments as mere checkboxes to fulfill regulatory requirements. They turn ESG principles into real, tangible actions that a company follows in how it operates. This results in a clear purpose that runs through the veins of the organization, shaping every decision and action. This “why” becomes a part of the company's DNA, woven into its core values and embedded into its brand story.

In this guide, we will explain the difference between ESG leaders and laggards. Keep reading for valuable insights on how to take sustainability from a mere box-ticking exercise to truly operationalizing—or putting into action—ESG across your portfolio.

ESG leaders in Private Equity reap the benefits 

We’ve previously touched upon the reasons why private equity can’t afford to neglect ESG. In a nutshell,  Ignoring ESG operationalization means missing out on profit with purpose. The numbers speak for themselves: 

• 73% of investors believe that a company’s social and environmental initiatives are tied to returns. (WEF)
• Companies driven by a strong sense of purpose are over twice as likely to rank in the top two quartiles of 10-year total shareholder returns compared to those who lack a clear purpose. (BCG)
• Companies that prioritize employee satisfaction, a key drive of business success and revenue, tend to have ESG scores 14% higher than the global average. (Marsh & Mclennan) 
• The value of ESG assets reached $35.3 trillion in 2020 (36% of total assets under management). This figure is projected to increase to $50 trillion by 2025. (Bloomberg Intelligence)

These statistics underscore the growing importance of ESG in private equity and highlight the immense potential for firms that proactively ingrain sustainability principles throughout their operations. By transitioning from compliance to proactive operationalization, private equity firms can position themselves for competitive growth, mitigate risks, and tap into new opportunities that align with the evolving expectations of investors, stakeholders, and the broader society.

Moving beyond ESG as a box-ticking exercise

The difference between companies that treat ESG as a box-ticking exercise and those that live and breathe ESG principles lies in their level of commitment, integration, and impact. Here are some key distinctions:

Mindset and Commitment

ESG Laggards: Companies that view ESG as a box-ticking exercise merely fulfill minimum requirements or comply with regulations without fully embracing the underlying principles. Their focus is on meeting the bare minimum to satisfy external expectations.

ESG Leaders: Companies that operationalize ESG principles demonstrate a genuine commitment to sustainability. They view ESG as an opportunity to create long-term value and integrate it into their core strategies, culture, and decision-making processes.

Integration and Strategy

ESG Laggards: Companies with a box-ticking mindset may have separate ESG initiatives or standalone departments, often disconnected from core business operations. ESG is treated as an isolated function or add-on, lacking integration with overall strategy and operations.

ESG Leaders: Companies that operationalize ESG principles seamlessly integrate sustainability considerations into their entire value chain. ESG becomes an intrinsic part of their business strategy, influencing investment decisions, risk management, supply chain practices, product development, and customer engagement.

Impact and Outcomes

ESG Laggards: Companies treating ESG as a box-ticking exercise may achieve short-term compliance or minimal improvements in specific areas. However, their impact on sustainability may be limited, and they may fail to realize the potential long-term benefits of ESG operationalization.

ESG Leaders: Companies that operationalize ESG principles drive meaningful change and generate positive impact. They actively pursue sustainability objectives, resulting in improved financial performance, reduced risk exposure, enhanced brand reputation, and positive social and environmental outcomes.

Stakeholder Engagement

ESG Laggards: Companies adopting a box-ticking approach often focus on meeting external reporting requirements or satisfying investor expectations without genuine engagement with stakeholders. Their approach lacks transparency and fails to build trust or create shared value.

ESG Leaders: Companies that operationalize ESG principles prioritize stakeholder engagement and collaboration. They proactively involve stakeholders in decision-making, seek feedback, and address their concerns. By actively responding to stakeholder expectations, they build stronger relationships and foster sustainable business practices.

Ultimately, companies that operationalize ESG principles go beyond superficial measures and embrace sustainability as a core driver of their business strategy and purpose. These forward-thinking companies view ESG not as a burden, but as a competitive advantage, a way to stand out and make a meaningful difference in the world. It becomes their calling, their driving force to create a better future for all.

Next steps

Now that you know the difference between companies who simply comply with ESG requirements versus those that take ESG operationalization to the next level, don’t miss the following articles in the series: 

• ESG Is An Essential for Private Equity Investors. Here’s Why.
• ESG Integration in Private Equity: From Due Diligence to Exit