Understanding and achieving the ESG premium – Q&A with Cornelia Gomez, Global Head of ESG and Sustainability at General Atlantic

Cornelia Gomez, Global Head of ESG and Sustainability at General Atlantic, recently spoke at SuperInvestor 2023, about the future of the ESG role in private equity. We caught up with her to delve a little deeper into the way in which LP priorities are shaping sustainable investment approaches; whether ESG’s role as a competitive differentiator is at risk; opportunities and challenges in achieving ESG-led value creation; and the untapped potential of the ‘G’ in ESG.

To what extent are Limited Partners (LPs) driving the agenda forward when it comes to ESG-aligned portfolios?

LPs have been a key driver behind the ramp-up and development of ESG that we’ve seen across the private markets space, particularly over the last five years. ESG-focused questions and stand-alone ESG questionnaires have become an increasingly substantive element of the dialogue with GP investors. Over time, these conversations have supported the build-up and expansion of internal ESG resources and expertise.

There is a vast spectrum of expectations and requirements, but we are working with a group of forward-looking LPs to collect meaningful data and report in an insightful way. LP approaches have become increasingly granular and it is now common to receive questionnaires split across firm, fund, portfolio and asset-level approaches. The direction of travel is more questions on every level and higher expectations to translate policies into real-life outcomes.

Businesses today are increasingly aligning sustainability with corporate strategy. As ESG moves from niche to mainstream, can it still provide a true competitive advantage?

It is truly differentiating to have a leading ESG team and all the processes and data points in place to demonstrate how your policies and commitments translate into action. If you think about how you differentiate yourself as a fund, it really boils down to your investment performance and your ability to return liquidity to investors. Having the right level of ESG engagement, tools and expertise has a compounding effect on investment performance, both through value creation and protection.

If you hone in on growth and resilience, you can open up multiple pathways for value creation within portfolio companies, including:

Business risk management and resilience: This involves protecting value through downside risk management and building awareness and resourcing around risks, driven in part by increasing regulatory requirements.

Operational levers: This is the next level bridging downside risk management and actual top-line growth. For example, if you reduce the carbon footprint – and as such the energy consumption – of an asset-heavy company, this may boost efficiency and positively impact the overall cost structure.

Access to more capital: Having a strong ESG story and being able to articulate it clearly to your investors opens up greater access to more capital, whether that’s debt provision or, in the event of an IPO, appealing to investors specifically seeking sustainability premiums.

Top-line growth: Today’s consumers are ready to pay a premium in the range of 12-15% for truly green and sustainable goods, though there is a careful balance to be struck here. We often see companies overestimating this premium and overpricing their products.

Enhanced governance: If approached correctly, work across ESG risks will improve the quality of governance across a company. Enhancing governance structures requires ESG to be addressed from the top-down, with full buy-in from senior management, enabling better and more thoughtful governance of non-financial issues that will ultimately influence the company’s profile, resilience and performance.

Which letter(s) in ESG do you think presents the biggest opportunity currently in terms of value creation?

I often find it strange that ‘G’ comes at the end of the acronym, given that we should all be laser-focused on how to better govern the E and S. There is so much more potential to be unlocked by fully addressing the ‘G’ in ESG. Governance should absolutely be top of mind every time you talk about Diversity, Equity and Inclusion (DEI), risk management or any type of systemic change since it has to start from the top to effect any meaningful change.

Currently, many people tend to associate governance with mere box-ticking and compliance, whether that’s codes of conduct, responsible business policies or training on anti-money laundering and fraud. While ultimately, governance should provide a framework for how you manage ESG across a business – right down to the organisational chart. Who is part of the ESG team? Who reports to whom? What’s the link to the board? Is there a sustainability committee? What does the budget look like and who determines it? Do you have the right amount of independence across the board?

What is the biggest challenge in ensuring success in ESG value creation?

First and foremost, it’s a question of buying into the link between ESG and value creation. For many, this is a challenge of visibility and awareness across a firm – from the deal and operations teams to the sales and marketing functions. Firmwide appreciation of the intertwined nature of non-financial issues and investment performance is key to maximising the impact of an ESG team. For example, embedding ESG into the supply chain and ensuring you’re not operating in an “at-risk” country in terms of human rights or environmental compliance requires coordination across procurement, operations and ESG teams.

Is it possible to maximise ESG impact through a minority stake?

It is certainly possible to lean in as a minority investor. By providing your portfolio company relevant support on the issues that matter to their growth story, you can exert significant influence. I would perhaps caveat this by saying that having some kind of minimum amount of leverage can strengthen conditions of being heard. That said, GPs with a lower stake but deep ESG expertise and insights can arrive at the same destination by adopting the role of an external senior adviser. The most important thing is the results.

What will you focus on in 2024?

In 2024, I will be very focused on aligning our ESG priorities with the priorities of the firm. In the current environment, our ESG and sustainability team will be looking at how we can best support fundraising efforts by meeting – and exceeding – the underlying expectations of LPs.

In terms of topics, something that really interests me that I’d like to focus more attention on in 2024 is responsible Artificial Intelligence. I’m very eager to get ahead of this fast-moving trend. Stay tuned for more on that!

Want to hear more? Watch this interview with Cornelia Gomez as she discusses newfound ‘greenhushing’ from ‘greenwashing’, ESG and sustainability. To register for next year's event, head here

With thanks to BackBay Communications for their contribution to this article.