“Today, across many different industries, it pays to be more conscientious.”

Q. How do ESG issues influence your investment approach?

Donald Tang: Ten years ago, companies had to decide whether to invest some margin into doing the right thing. Today, however, across many different industries, it pays to be more conscientious. Part of that is because consumers and governments care more, and regulations require it. Technology has also improved: solutions to certain ESG-specific problems in many areas have been commercially viable.

For a confluence of these reasons, I believe every PE firm needs a real understanding of ESG matters.

Q. What does that mean for your portfolio?

Donald Tang: Unlike other firms that are focused on sectors such as technology, we’re much more interested in traditional industries. They may appear to be less sexy, but they’re also less fully valued with very high operating leverage and, when new technologies arise, these businesses can be transformed—both from an efficiency perspective and in terms of ESG considerations. For example, we own a business that makes knitted uppers for footwear companies; if we use automation, we can become much more efficient, and we can also reduce waste to almost zero to support the environment.

In fact, in this portfolio company, the majority of its production is made from recycled plastics recovered from the ocean. That’s not simply because it’s the right thing to do or because consumers insist we do so. It’s also more profitable because it offers us an opportunity to differentiate ourselves from the competition. That’s what drives the business.

Q. How important are these issues to investors?

Donald Tang: It depends on the investor. For us, though, it’s not about adopting a feel-good approach that enables more dollars to be raised. There isn’t a standard approach right now for what to track or how to measure, especially for things that are harder to quantify. And, ultimately, this is not a marketing story. There are real risks and real opportunities for impact. For sustainability itself to be sustainable, it must be core to the business proposition. It needs to drive profitability or reduce risk.

Q. How do ESG considerations come into play during the deal process?

Donald Tang: There are many sectors impacted by ESG considerations and we try to understand where the risks lie, where change is needed, where technology enables a new approach, and where there are opportunities for growth. ESG decisions are an integral part of our investment analysis and diligence process.

What makes the world exciting today is that the assumptions that underpin many industries are changing. Whereas, before, the supply chain was solely optimized around lowest cost and massive volume, many other considerations have become important today—environmental footprint, robustness against disruption, and so on. That creates opportunities for incumbents to be upgraded or for new players to take over. Understanding that is critical for long-term success as an investor.