4 reasons why private companies need an ESG strategy

Even if private companies aren’t directly subject to a regulation, their public company customers might be. That means private companies need to report certain ESG information so their customers can comply with requirements. Because demand for ESG reporting continues to increase, private companies likely will see more ESG-focused surveys, requests for compliance documentation, supplier scorecard metrics, and benchmarking. As customers craft their ESG goals and manage their compliance obligations, they might request that the private companies they do business with honor codes of conduct and new contract terms, provide detailed sourcing data, answer sustainability questionnaires, and commit to a variety of risk mitigation efforts. Taking the time to understand customers’ ESG goals can help maintain and strengthen these relationships. Focusing on key customers and growth markets and researching any current requirements in client agreements, terms and conditions, and other legal documents is a good first step. Then it’s possible to identify areas of overlap and create a cohesive plan.

The amount of lender and investor capital that’s tied to ESG metrics continues to grow. “Green” lending can present new opportunities, lowering the cost of capital when borrowers can show a financial commitment to ESG metrics. Additionally, many large private equity groups have been very vocal about tying certain ESG metrics – everything from diversity in the C-suite to greenhouse gas emissions – to allocation of capital. An increasing number of companies also are signatories to the The Principles for Responsible Investment (PRI), which requires a specific commitment to goals and reporting. Researching individual organizations’ ESG statements can help clarify what lenders and investors expect from their investments.

Not all regulations are limited to public companies. For example, regulations such as Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH), the Corporate Sustainability Reporting Directive (CSRD), and the California Transparency in Supply Chains Act focus on a specific size threshold, location, or where you sell your product – not ownership structure. Organizations should review the regulations in all the jurisdictions where they do business (and where they want to grow) to understand any requirements based on geography, size, or revenue.

People want to work for companies that show a commitment to ESG efforts, such as diversity, equity, and inclusion (DE&I); community engagement; and environmental preservation. A strong ESG strategy differentiates companies by helping both attract and retain employees. A great way to get started is by asking employees what matters to them. If businesses already are making efforts in ESG through initiatives like DE&I, remote work, employee wellness, and continuing education support, they should communicate these efforts in the context of an overarching ESG strategy.

Your private company’s ESG strategy must be properly managed to protect your revenue, relationships, and reputation. While there’s no one-size-fits-all ESG plan, creating a cross-functional ESG team in your organization to assess where you currently stand is an excellent initial step. Then, consider performing a materiality assessment and evaluating stakeholder engagement to help prioritize future efforts. Putting in the effort now can help you stay ahead of the competition as ESG continues to grow and evolve.