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PGIM Private Capital provided $13 billion of senior debt and junior capital to 228 middle-market companies and projects globally in 2019.
Companies are increasingly adopting a “profit with purpose” mindset and investors should be aware of relevant environmental, social and governance (ESG) information as part of their investment process, according to global fund manager PGIM.
PGIM recently conducted a survey of companies in the U.S., Germany and China, and found that 55% of German firms consider “a range of stakeholders beyond equity holders and short-term profit maximization” compared to 38% and 30% of firms in China and the U.S., respectively.
Written by Rachel Alembakis for the Sustainability Report.
“It means a couple of things from an investment perspective,” said Taimur Hyat, chief operating officer at PGIM. “It means understanding which companies have these broader purposes, and to what extent are they impacting profit maximisation at these companies,” “If you have a long term outlook like we have, the more companies incorporate ESG and broader purpose goals into the franchise, the more we understand how long term value is created.”
The PGIM survey showed the key reasons for firms to adopt purpose beyond profit are increased sales from a reputation boost (50%), long-term business viability (44%) and their ability to attract top talent (33%).
A smaller share of firms said it was because it was the right thing to do (19%) or that it serves the company’s core purpose (18%), PGIM said. “Engaging with companies reveals which management teams are positioning their companies to the risks of the transition to a low-carbon economy, which ones face reputational risk, which management teams are overly aggressive in reporting cashflows, which boards are lax on monopolistic challenges,” Hyat said.
This process of gaining greater insights into companies strategies and investments matches with another finding of the survey – in China and the U.S., 77% and 58% of firms, respectively, indicated intangible assets like data, software and brands have become more important than physical assets over the last three years. By comparison, only 50% of German firms said the same. Furthermore, 74% and 58% of firms in China and the U.S. say they will use profits to invest in intangible assets, compared to just 35% for German firms.
This leads to a model of “labour-light, tech-forward” business models, and that impacts on the nature of the workforce, Hyat said.
“The nature of the workforce has changed,” Hyat said. “You have a more skilled workforce, their demands and desires have changed, and that has impacted what priorities companies put high up. You can see it in the statements.”
The survey’s findings align with PGIM’s views on ESG integration as part of the investment process, Hyat said.
“I do think the longer the horizon of the investment, particularly with regards to asset classes such as real estate and private assets, the more natural alignment there is with ESG goals, because over the long term there’s no distinction between ESG investing and non-ESG investing,” Hyat said.
The continued evolution of investment practices around ESG integration has meant that approaches have moved beyond exclusion lists and into incorporating of ESG data more widely, an evolution that adds weight to the engagement work that investors have done around corporate disclosures.
“The other big piece here is the role that investors can play in influencing corporate reporting to drive ESG outcomes,” Hyat said. “There is a wide variance in methodologies and reporting of ESG data around the world. It tends to be sparse, lagged, sourced from a wide array of voluntary disclosures often surveys and interviews, and companies have an incentive to greenwash the data because they have a high degree of latitude of what they report and how they report it and whether its apples to apples to how others report.”
*This article first ran on March 6 in the Sustainability Report.