Has Covid-19 Pandemic Made ESG a Priority?

An Interview with Carrie DiLauro, Director of Operations at Hamilton Robinson Capital Partners, on the recent rise in ESG investment demand.

In recent years, ESG, which stands for Environmental, Social, and Governance, has become increasingly popular among investors. Though many businesses suffered financially due to the Covid-19 pandemic last year, the ESG sector witnessed a significant increase in investment.

In 2020, more than $51 billion was invested in ESG funds, a record which was double the amount of 2019. The pandemic appears to have made people more aware of the potential risks and vulnerabilities that we face, leading to a shift in investment in these funds.

As a result, firms of all sectors from banking to manufacturing are increasingly trying to balance profit-making with social and environmental responsibility. One such firm is Hamilton Robinson Capital Partners (HRCP), a Connecticut-based private equity firm focusing on lower to middle-market companies.

“Coming out of Covid, ESG is something we all need to focus on,” said HRCP’s director of operations, Carrie DiLauro, we are working with our management teams to take steps to improve their ESG practices to grow and protect their financial performance.  She said her portfolio companies have recently hired several diverse candidates for the Chief Financial Officer (CFO) position and another company has achieved zero waste to landfill. A diversified workforce that includes minority and female employees is considered a key ESG issue.

To DiLauro, ESG compliance is not an overnight process but rather one that requires a long-term commitment. She called it an “evolutionary concept” rather than a revolutionary one.

“What we’ve seen during fundraising is you have to just make an effort. There is no investor out there that expects you to go zero waste to landfill by next quarter,” she told me in a recent Zoom call.

Last year’s surge in ESG investing coincided with the election of President Joe Biden, who rejoined the Paris Climate Accord after his Republican predecessor, Donald Trump, had left the agreement. Shortly after assuming office, the Biden Administration rescinded Trump-era rules that discouraged fiduciaries from including ESG factors in “the financial evaluation of plan investments.”

Currently, Washington is hearing louder voices in Congress to take action on climate change and support ESG legislation. Whereas the U.S. differs from Europe in that it does not explicitly regulate ESG, its Environmental Protection Agency (EPA) has rules that may apply to ESG-related risks. From 2018 to 2020, US-based registered investment companies, such as mutual funds, variable annuities, exchange traded funds (ETFs), that incorporated ESG investing criteria grew by 15% to more than 800 companies, according to the Forum for Sustainable and Responsible Investment (US-SIF).

“Understand that you need to show some year-over-year improvement, make sure you have measurable KPIs in place,” she added. KPI stands for Key Performance Indicator, which private equity firms use to measure the effectiveness of their investments.

“No matter where you start, even if you’re starting at zero, if you add one [minority] person to a five-person management team … you’ve increased your KPIs by 20%, which is fantastic. Don’t make it something that seems so overwhelming that you don’t get started.  Start immediately and start easy,” she said.

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