Achieving Profit and Impact: Can Private Equity Do Both?
Many Americans are skeptical that it’s possible to achieve both of those goals together. In a 2017 survey of people’s perceptions of profitability and overall societal contribution of 40 familiar Fortune 500 firms, participants strongly associated profit with negative societal value. That is, most people saw profit as a zero-sum game, the study’s authors, Amit Bhattacharjee and Jason Dana reported in the Harvard Business Review.
“There is this perception, I think, still, that if you are investing, that you can’t do good and do well at the same time,” Neha Champaneria Markle, head of Morgan Stanley’s private markets fund of funds team, said at the RFK Compass Summer Investors Conference in June. “You can do financially well while also driving positive impact.”
Part of that misperception may be just a misunderstanding that profit incentive can be harnessed to good causes. Finding ways to align investment performance with social impact was a key topic of discussion at the conference, convened in-person for the first time since 2019. The event brought together RFK Compass’s network of investors representing about $7 trillion in assets under management and attendees revealed many examples of how they’ve been able to achieve both profit and impact.
Vivianne Akriche, managing director at Eurazeo North America, shared the story of how the €32.5 billion private asset manager cut costs at a pharmaceutical company that it invested in a few years ago. Naturally, that helped boost profits, but it also came with a positive impact.
Eurazeo noticed that one of the divisions of the company relied heavily on coal to generate steam for its manufacturing process. So as soon as Eurazeo made the investment, it started looking for cleaner power alternatives. Through investments in a biomass cogeneration unit and a waste to energy power plant, Eurazeo has been able to move the company away from coal entirely, reduce the company’s carbon emissions by 50% and save roughly €10 million per year in costs (at full ramp-up by end 2024). The goal was “doing good for the planet as well as for investment,” she said.
The tactic wasn’t a one-off move. Such environmental, social and governance (ESG) considerations are embedded in Eurazeo’s value creation plan. As soon as the company makes an investment, it has ESG analysis embedded in its investment process to spot opportunities like the power replacement project at the pharmaceutical company. She said ESG is a “fundamental tailwind” that Eurazeo is betting on.
But the road to aligning profits and positive social change isn’t always straightforward. Candace Shaw, SLC Management’s deputy chief investment officer, shared the story of a fundraising pitch that sounded promising but didn’t stand up to scrutiny. It was a proposal from a fund manager targeting investments in Canada’s indigenous communities to help them grow and prosper.
The proposal was extremely enticing to the $335 billion asset manager. But when Shaw’s team did some due diligence on the fund, they discovered that no one at the company or on its board had any indigenous heritage. Shaw said that good intent was not enough: They had to have representation from the communities they intended to work with.
Shaw said the solution is to think more holistically about ESG investments. Instead of ticking boxes, investors should be driving change with their capital allocation decisions. For example, Sun Life Capital Management has investments in energy companies that on the surface look like major contributors to carbon emissions. However, she believes that it’s important to give such firms capital when they show intent to change, and then help them along in their transformation.
“None of us are at net zero right now but we all hopefully have plans to get there. That’s like many of these energy companies,” she said. “Just sort of not giving capital to those companies and hoping somebody else is going to fix the problem, I don’t think is the way to move forward.”
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