Avoiding DE&I and ESG pitfalls

Tackling social impact initiatives requires GPs to wrestle with their larger purpose, write Matt Brubaker and Will Busch, III, from FMG Leading.

Matt Brubaker
Will Busch III

The movement challenging investors to quantify positive impact on society has, ironically, paralysed much of the private equity mid-market. GPs are understandably wary of potential backlashes tied to diversity, equity and inclusion 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 tightrope is not easy, but there’s a way forward – a playbook to follow.

Re-grounding in the unique and differentiated aspects of its identity and purpose will help a private equity firm to accelerate its 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 programmes.

Though relatively simple, such exercises are often a barrier to progress on DE&I and ESG, which can easily be dismissed as ‘touchy feely’. To ensure buy-in, top leaders must communicate and demonstrate their commitment to this work by carving out real time to participate and by strongly encouraging others to do the same.

An authentic approach

It is usually wise to bring in outside partners or resources to facilitate this process. Doing so can help GPs to properly set their compasses and root their efforts in a place of authenticity. From there, they can amend strategies and practices to reflect their identified values, as well as create rubrics and feedback loops that define and measure success, and keep efforts on track.

Outside help can also prevent GPs from succumbing to common pitfalls. For example, PE leaders should not pursue initiatives simply to minimise reputational risk or achieve compliance. This guidance should help quell the temptation to release proclamations simply because they see others doing so.

Firms should also avoid trying to solve everything, especially at the beginning of this process. Instead, they should simply ‘start where they are’ – for example, by putting metrics and intentionality around areas that leaders are already discussing but to which they are not yet holding themselves accountable.

Private equity firms’ 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 organisations. 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 organisation’s DNA.

Matt Brubaker is CEO of FMG Leading and an expert on organisational assessment and change. Will Busch, III is managing director of growth strategies at FMG Leading, where he designs, implements and leads strategic human capital initiatives that accelerate growth