September 19, 2021
Chris Clark conducts interviews with leading corporate directors and subject matter experts for NACD Private Company Directorship, a bi-weekly e-publication about private company board leadership and governance best practices, on critical issues from ESG, crisis communications, and cyber-resiliency to succession planning and board composition. Here, he interviews Chad Spitler, the Founder and CEO of Third Economy, a sustainable investment research and advisory firm.
1. How do the ESG principles for public companies apply to private companies and their boards?
The ESG (environmental, social, and governance) principles that apply to private companies are not necessarily based upon whether a company is public or private. The more significant considerations are a company’s size, sector, and business model. Investors evaluate ESG factors based on a company’s sector-specific business risks and opportunities irrespective of whether public or private.
Trends in the public and private markets demonstrate how this is playing out. While differences in capital access exist between the two, the commonality for both is that ESG is now a requirement to attract, secure, and retain capital and talent. Historically, we saw two ends of the spectrum: ESG integration within the large-cap, public equity space at one end; and the willingness to give small-cap or pre-IPO companies a grace period to launch ESG programs at the other. Yet that approach is waning. Investors are advancing expectations around ESG after getting burned too many times in the past. Consequently, private companies are now developing more sophisticated approaches to ESG earlier in their development. Both small-cap and pre-IPO companies are quickly recognizing the benefits of disclosing a robust ESG approach integrated with long-term corporate strategy to improve valuations and attract capital from big mainstream investment managers.
One area where there has been a difference in ESG as it pertains to public versus private has been in reporting. However, that too is also changing, and we are seeing more private companies disclose their approach to ESG publicly as they compete for capital and talent.
I recommend the reporting framework by the Sustainability Accounting Standards Board (SASB) as an important guide for both private and public companies in determining the ESG factors most relevant to their financial sustainability, as noted in SASB’s October 2020 publication, “Integrating ESG Holistically in Private Equity: A Strategic Approach.”
2. Is the “G” of ESG still the smartest priority for small companies and private companies?
Yes, the “G” is universal and applicable to all companies. Investors typically view a company's approach to ESG through the lens of governance. In addition to traditional governance matters such as separation of Chair and CEO, majority voting, board independence, and diversity, many investors want to understand what I call the “governance of sustainability” to specifically address questions such as: Where does oversight of long-term risk management and opportunity identification reside within the board? Is the board thinking about strategy in the context of both its financial sustainability and its potential impacts on the environment or society to best maximize the positive outcomes while minimizing the negative?
Regardless of being a new or small company, governance is critical from the start. It is essential to have a diverse, talented leadership team in place that can build a high-performing, healthy culture to execute the corporate vision. I recommend that a company build its approach to governance first with qualitative statements and policies, then advance to metrics, and ultimately track those metrics relative to goals over time.
Another important aspect of governance, irrespective of size, is compensation alignment. People do what they are incentivized to do, so we advise leveraging compensation programs to build strong, financially sustainable companies using a combination of short-term and long-term incentives. Furthermore, many investors believe that governance of the environmental and social aspects of a business’ risks and opportunities, in addition to more traditional factors, will lead to better financial performance.
3. What ESG considerations should P/E owned companies fully embrace in 2021 and 2022?
Two of the biggest investment trends are ESG analysis and impact investing, thus we find more P/E-owned companies taking advantage of both. We think of ESG as the “how” — how is your company managing its long-term financial sustainability? Impact is about the “what” — what are the consequences that your company has on the environment and society? Regardless of size, sector, or whether private or public, it’s important to view corporate strategy in terms of both the “how” and “what.” We therefore encourage every company to integrate three key ESG considerations into corporate strategy: sustainability governance, climate, and diversity.
First, a company needs to assign specific responsibilities among both the board and management team for the “governance of sustainability,” including the integration of ESG risk and opportunity assessment into corporate strategy and executive compensation.
Next, every company needs to consider its approach to diversity, equity, and inclusion (DEI). Solid DEI practices are proven to contribute long-term financial value in building successful, sustainable companies — and ultimately, it is also the right thing to do. If you want to attract and retain the best talent, it’s a must.
Finally, no one and no company can ignore climate change. Yes, the literature indicates potential financial implications. Furthermore, we all have a responsibility to think about the impacts that our businesses and our lives have on the environment and society. Additionally, why not take advantage of increased opportunities to capitalize on climate trends through innovative climate change mitigation and adaptation strategies?
Governance, diversity, and climate all have a growing body of evidence indicating potential financial relevance, as well as growing significance culturally and socially. As such, I recommend every company embrace these three key elements and integrate them into corporate strategy.
Chad Spitler is the Founder & CEO of Third Economy, a sustainable investment research and advisory firm. With over 25 years of experience building sustainable investment capabilities and corporate sustainability strategies, Chad was recognized by NACD as one of the 2020 Directorship 100 Governance Professionals. Formerly a Partner at PJT Camberview, Chad and his team helped public companies develop engagement strategies with their investors. Prior, as a Managing Director at BlackRock, Chad led the team responsible for analyzing how ESG factors may impact financial performance, and integrated that analysis into product development, proxy voting, and corporate engagement.
Christopher Clark, Publisher, Directorship & NACD Private Company Directorship; and Senior Director of Partner Relations, NACD.