ESG and the portfolio company board

Private capital markets are surging, inviting both wider investor interest and regulatory scrutiny. The spotlight is also bringing a focus on how private companies are approaching climate change, workplace diversity, and a variety of other environmental, social, and governance (ESG) issues that are prominent in the public company conversation. While venture capital investors, private equity firms, and family owners may define board priorities differently across their portfolios, this shifting business environment will require portfolio company directors to reassess the importance of ESG issues to company performance and consider how ESG risks and opportunities are overseen in their boardrooms.

To better understand how private company boards are responding to heightened expectations for oversight of ESG, the KPMG Board Leadership Center surveyed nearly 200 portfolio company directors who fall into three categories: executives, investment professionals, and outside directors. We asked the directors to supplement their survey responses with write-in comments to expand on their views.

Taken together, the survey responses and write-in comments offer a glimpse into how private portfolio company boards view the importance of ESG issues to company performance, as well as the role of the board in overseeing these issues. Key takeaways include the following:

• Portfolio company directors rate ESG issues—including environmental risk and opportunity, workplace diversity, and ESG-related disclosures—significantly below the importance of the board’s oversight of strategy, talent, and corporate governance. This suggests that directors generally do not view ESG issues as critical to company performance; in fact, only half say their board believes that ESG issues have an impact on their company’s financial performance.
• When they are considered by the board, ESG priorities are driven by critical business issues. Among the directors surveyed, the factors having the greatest influence on ESG priorities are alignment with strategy, long-term value creation, customer expectations, and, for a small subset, moral/ethical reasons.
• Portfolio company directors have significant room to improve their understanding of the companies’ ESG issues, including management’s approach to metrics and measurement.
• Some ESG topics are not yet dedicated board agenda items. Many directors say that ESG issues—such as climate change and its impact on the business, as well as workplace diversity, equity, and inclusion (DEI)—should be added to the board’s agenda.
• To help the board to get a better handle on the company’s ESG risks and opportunities, directors cite the need for more frequent updates from management, board-level training and enrichment, and clarification of the board’s own priorities. They also said deeper dives on specific issues, competitive benchmarking, and employee surveys would be helpful.

Private portfolio company boards looking to expand their awareness of environmental and social issues may find that they are already focused on one critical component of the ESG conversation. Corporate culture—which 95% of respondents said is currently on their board’s radar—is increasingly recognized as key to executing on strategy and surfacing risks. While “S” or social issues expand to community engagement, human rights, diversity, and more, culture is seen by many as a gauge for the company’s ability to grow and retain talent, work with suppliers and business partners, and promote transparency. Deeper inquiry on culture—what drives employees, how they feel about products and services, whether transparency is encouraged—can help the board probe latent ESG matters and how they impact the company.