Why ESG Is Here to Stay
Signs suggest that investors are pursuing ESG-friendly targets, despite a lack of empirical evidence about these strategies.
This article was published in partnership with Grata. It originally appeared in the “Behind the Data” section of the fall 2021 edition of Middle Market DealMaker.
Over the past 15 years, interest in environmental, social and governance (ESG) factors has created a noteworthy investment opportunity for private equity firms. As Bain Capital noted in a recent report, “ESG isn’t just a nice thing to do. It is becoming a critical element in gaining market share, engaging employees and raising capital.”
However, the growing attention paid to ESG raises a question: How can you quantify the validity of this type of investment without the wealth of empirical evidence that PE firms typically have at their disposal?
ESG constitutes a set of criteria applied in investment decisions to analyze organizational operations in the context of social and environmental consciousness. These types of investments have become more prevalent as many PE firms attempt to connect to a new generation focused on ethical concerns.
Search behavior underscores the growing interest in ESG.
Although there is still skepticism toward ESG, Grata believes that the trending data is worth noting. Economic stakeholders are displaying clear behavior that seems to legitimize an ESG strategy; for example, 79% of consumers polled in a 2020 Capgemini survey said they would change buying preferences based on sustainability.
Dealmakers appear to be taking note of this change in behavior, based on increases we’ve observed in the Grata platform across two metrics: search queries and questions directed toward the customer success team. Both of these data points indicate increased interest in ESG investments, despite the lack of empirical data. Most notably, inbound support requests to our team have substantially increased in the past year.
Ultimately, there will be skepticism around ESG until data emerges on the level of financial returns, but we see Grata users increasingly looking for opportunities in this arena. We believe that the increased traffic indicates a shift in interest toward investment opportunities that fit within the ESG framework.
Among the Grata search results for companies in this category is Hempitecture, which makes home insulation and “concrete” from hemp. This sustainable process absorbs carbon dioxide and offsets the company’s carbon footprint. In light of building material shortages, consumers are increasingly likely to target alternatives to traditional construction, which inevitably raise a number of ethical concerns.
Another example is Green Apple Cleaners, a company initially started because new parents didn’t want to use harmful chemicals when washing their children’s clothing. The company’s process of using liquid carbon dioxide rather than gas CO2 offers a cleaner alternative. Parents in 2021 are more and more aware of the factors that affect their children’s health; therefore, it’s impossible not to see the value of a service that provides peace of mind to the consumer.
Grata believes that ESG investment opportunities will continue to grow beyond their niche beginnings and should be targeted as viable alternatives to traditional investment. The push by consumers to take a stronger stance on green products and processes indicates that there is built-in value in an ESG strategy already. And as more companies begin to shift their focus toward the core principles of ESG investments, so too will the M&A community.
Nevin Raj is the chief operating officer and co-founder of Grata, a B2B search engine for discovering small to middle-market private companies. At Grata, Raj is responsible for leading operations of the business, from sales and marketing to customer success and data initiatives.
