Avoiding DE&I and ESG Pitfalls
Tackling social impact initiatives requires GPs to wrestle with their larger purpose.
Originally published in Private Equity International’s US Mid-Market Issue, September 2021
Dr. Matt Brubaker
Will Busch III
The movement challenging investors to quantify positive impact on society has, ironically, paralyzed much of the private equity middle market. GPs are understandably wary of potential backlashes tied to DE&I and ESG initiatives, having watched countless companies put forth bold statements, only to be perceived as hypocritical. Still, they understand that LPs and younger talent increasingly expect them to demonstrate their commitments to the greater good.
This has placed them in a delicate position, in which the risks of both action and inaction are significant. Walking this tight rope is not easy, but there’s a way forward – a playbook to follow.
Re-grounding in the unique and differentiated aspects of their identity and purpose will help private equity firms accelerate their DE&I and ESG efforts. This means identifying positive impacts the firm is already achieving, beyond creating investment returns. For example, some firms focus on improving efficiency or access to services. Others intentionally use the efficiency of private capital to drive rapid innovation in sectors dominated by behemoths. Such “identity” work is the seedbed of sustainable DE&I and ESG programs.
Though relatively simple, this exercise is often a barrier to progress on DE&I and ESG – easily dismissed as “touchy feely.” To ensure buy-in, top leaders must communicate and demonstrate their commitment to this work, carving out real time to participate and strongly encourage others to do the same.
“PE leaders should not pursue initiatives simply to minimize reputational risk”
An Authentic Approach
It is usually wise to bring in outside partners or resources to facilitate this process, helping GPs properly set their compasses and root efforts in a place of authenticity. From there, they can help amend strategies and practices to reflect firms’ identified values, as well as create rubrics and feedback loops that define and measure success, and keep efforts on track.
They can also prevent GPs from succumbing to common pitfalls. For example, PE leaders should not pursue initiatives simply to minimize reputational risk or achieve compliance. This guidance should help quell the temptation to release proclamations simply because they see others doing so.
They should also avoid trying to solve for everything, especially at the beginning of this process. Instead, firms should simply “start where they are” – for example, putting metrics and intentionality around areas leaders are already discussing but to which they’re not yet holding themselves accountable.
Private equity’s DE&I and ESG initiatives should simply be about creating value, just like the work they do every day, but intentionally touching on the needs of a broader group of stakeholders. What’s more, initiatives should complement value creation efforts already underway within organizations. They should demonstrate a clear, measurable business impact, contribute directly to differentiation and competitive advantage, and create sustainable momentum.
Approaching DE&I and ESG efforts in this manner is the ideal way to create integrated, impactful, authentic initiatives that incorporate good intentions into an organization’s DNA.
Matt Brubaker is CEO of FMG Leading and an expert on organizational assessment and change. Will Busch, III is former Managing Director of Growth Strategies of FMG Leading where he designed, implemented, and led strategic human capital initiatives that accelerate growth.