#13 Cyril Demaria
In this Fund Shack private equity podcast, we explore the intersection of private equity and environmental, social, and governance (ESG) principles.
Cyril Demaria shares his insights on how these two worlds can work together more effectively.
Today, ESG considerations are crucial for investors and companies. It’s no longer just about financial returns; social and environmental impacts matter too.
Demaria discusses the importance of ESG in the broader investment landscape. It’s about making investments that align with your values and the future you want to see. Private equity faces specific challenges in incorporating ESG principles.
One challenge is the long investment horizon; it can be challenging to predict ESG impacts over decades. Private equity investors also lack transparency compared to public markets. Demaria explains that ESG considerations can impact financial performance in both positive and negative ways.
Demaria acknowledges that ESG can act as a risk management tool. Companies that ignore ESG factors may face legal, operational, or reputational risks. Investors must factor these risks into their decisions. Demaria highlights the differences between private equity and venture capital in terms of ESG. Venture capital is often seen as more progressive, but some areas, like corporate culture, remain problematic.
The challenge lies in aligning investors’ perceptions of what’s right. Demaria raises the issue of incentives. What motivates investors to prioritize ESG? External positive impacts, like carbon savings, are hard to quantify, making it difficult to reward ESG efforts. The industry needs a system where ESG is recognized and incentivized.
Mainstream fund managers are under pressure to adopt ESG principles. However, Demaria criticizes some top-level schemes like the Principles for Responsible Investment (PRI). They often exclude ethical complexities and can be more about ticking boxes than true ESG commitment.
Demaria suggests alternative principles for ethical investing that reflect the world’s complexity and nuances. These principles would recognize ethical considerations as exceptional items and focus on explaining why certain decisions were made. The industry has become more process-oriented, diminishing the role of human judgment. Demaria advocates for reintroducing the human element into decision-making.
Human interactions, stories, and relationships often drive critical decisions. While the conversation remains open-ended, Demaria believes the private equity industry, with its intellectual power, can find innovative solutions to integrate ESG effectively and reintroduce the human factor into investment decisions.