Study reveals private companies that use an ESG framework perform better financially

Sustainability, diversity and employee satisfaction are all key ESG activities associated with private companies’ stronger financial profitability and growth, according to a new report.

The joint study by global consultancy Bain & Company and sustainability ratings provider EcoVadis looked at how 100,000 companies, (80 per cent of which are private) were impacted by the Environmental, Social and Governance framework activities and outcomes.

The ‘Do ESG Efforts Create Value?’ report provides new insights into how private companies can use ESG performance to their advantage, emphasising it is essential that private equity [PE] firms factor ESG into their approach.

Adopting ESG measures to bolster performance

Activities include the implementation of measures to improve DEI and reduce carbon, embedding sustainability into the management process and sustainable procurement, all of which correspond with ESG outcomes and financial performance. The EcoVadis scorecards also revealed that stronger revenue growth and higher EBITDA margins are also associated with ESG activities.

Nick Georgiou, Head of Private Markets & Real Assets UK, Sustainable Finance at Acre said: "ESG has evolved from a risk and reporting driven trend to a key enabler of value creation. As stakeholders demand more sustainable business models as well as greater transparency and accountability, companies that prioritise sustainability are discovering new growth opportunities and driving superior financial performance.

“The latest joint study by Bain & Company and EcoVadis reinforces this, revealing a positive correlation between ESG measures and financial outcomes, underscoring the importance of embedding sustainability into corporate strategies.

“This echoes the shifts we've observed in hiring trends across private markets, where companies now prioritise professionals who can create value using sustainability driven commercial insights while also advancing the quality of reporting and disclosure at both a fund and portfolio level. It's clear that ESG is no longer a nice-to-have, but a must-have for businesses that want to succeed in the long term.”

The research found just 35 per cent of large private companies achieve top scores for carbon management, compared to 53 per cent of large public companies, demonstrating the opportunities to improve ESG efforts.

Four correlations between ESG activities and business performance:
1. Companies with more women on the executive team have better financial results. Businesses ranking in the top 25 per cent of their industry for executive team gender diversity have annual revenue growth approximately 2 percentage points above that of companies in the bottom quartile. Their EBITDA profit margins are also three percentage points higher.

2. Renewable energy usage aligns with higher EBITDA margins in carbon-intensive industries. In the natural resources, transportation and industrial goods sectors, companies that use more renewable energy have higher EBITDA margins.

3. Companies that focus on ethics, environmental and labour practices within their supply chains are more profitable with margins three to four percentage points above those that don’t.

4. ESG leaders have higher employee satisfaction. Companies with the most satisfied employees grow faster and are more profitable with three-year revenue growth up to five percentage points above those with less-satisfied employees. Benefits may include fair pay and a safe work environment as a basic requirement but may also include career training, mental and physical healthcare, childcare, and educational opportunities, boosting employee satisfaction, productivity and retention.

A sustainable future for businesses embracing ESG activities

Ecovadis collaborates with a multitude of industry leaders including Johnson & Johnson, L’Oréal, Unilever and JPMorgan to drive positive impact, resilience and sustainable growth around the globe.

Sylvain Guyoton, Chief Rating Officer at EcoVadis, said: “These findings should motivate companies at all levels of ESG maturity to redouble their investment in accelerating their sustainability journey.

“For companies in nascent stages, this means developing sustainability management systems with policies, action plans and reporting. Companies at mature stages can pursue more advanced capabilities such as regenerative resource management and product circularity.

“Ultimately, cascading these practices into their value chains can support, for example, Scope 3 decarbonization and circularity initiatives, and also puts those trading partners on the same path to value creation. Our research shows this hard work will be well worth it.”

Axel Seemann, Advisory Partner at Bain & Company, said: “Our findings provide much-needed perspective in the debate as to whether ESG activities correlate with financial performance.

“This new data shows that positive ESG outcomes are a trait of successful companies. This should encourage private companies and investors to confidently double down on ESG efforts. We only expect this correlation to strengthen as ESG data becomes richer and more nuanced.”

​Nick joined Acre with five years of executive search experience within private markets & alternative asset management. Nick has worked with some of the biggest names in the asset management industry and has partnered with start-ups and family offices. His focus is on mid – senior mandates and has completed searches across Europe while headquartered in London.​