Moving from playing defense to offense: The case for integrating “E”,”S” and “G” in investment grids

Raphaëlle d'Ornano
6 min readNov 2, 2022

Environmental, social, and corporate governance, known commonly as “ESG”, has become an increasingly hot topic in investment circles even as these concepts remain frustratingly vague for many. The lack of clarity surrounding the definition of these terms has at times slowed progress, confused investors, and left the door open to political backlash, particularly in the U.S., where critics seem outraged by ideas that have little to do with the actual measures being proposed.

So, let’s take a deeper look at ESG and why it matters. I recently was invited to speak at the Greenwich Economic Forum on a panel about: “How to detect Greenwashing in the era of ESG”. But the conversation went well beyond that to cover all aspects of ESG. And there were some key takeaways that I think are worth sharing.

Fundamentally, the embrace of ESG by companies is about the planet we live on, the people we work with, and the impact we have on society. These are part of the post-Covid megatrends such as Digitization, Decarbonization and Sustainability that I’ve written about previously that are essential to evaluating the resiliency of assets.

And yet, investors and executives are still struggling to integrate an analysis of ESG into their financial and material outcomes. This is where we find resistance and hesitation. The ability to measure ESG varies widely between the three parts: E, S, and G. And as a result, leaders have used this as an excuse not to implement these programs or consider them as part of their investment thesis.

Indeed, we are hearing a growing number of ESG detractors in the investment world. According to a recent Pitchbook survey, many of these criticisms are political rather than rational or analytical. The survey reported LPs labeling ESG programs as “communist” or “socialist” or leaning on such shallow slogans as “go woke, go broke.” Much of this backlash can be addressed through education and better communication about the nature of ESG efforts.

But there remains a more fundamental fear that ESG runs counter to performing fiduciary duty. In this view, ESG comes at the expense of growth; it’s one or the other. But not only is ESG not an inhibitor to growth, but it can demonstrate the resiliency of a company that makes it a more attractive investment asset. Making ESG a part of your business strategy can unlock growth opportunities, reduce costs, and future proof your brand in the eyes of an increasingly conscious public.

ESG Metrics

While ESG is urgent from both an ethical and a financial viewpoint, making that case to analytics-driven leaders can still be daunting due to the state of ESG metrics. Part of the reason is the unfortunate bundling of E, S, and G into a single concept.

It’s important to differentiate between the three components because the capacity to quantify each one is quite distinct. Let’s unpack them.

If we start with the environmental component, the story here is a bit more concrete. Anecdotally, people have seen this past year the planet burning amid record high temperatures. Even longtime skeptics are finally acknowledging the reality of climate change. They understand that the planet we live on may disappear.

The good news here is that we now have very clear ways of measuring carbon emissions and the transitions companies are making to mitigate their impact on the climate. Those tools also help translate those elements into the financial impact on company statements. Climate can be incorporated into EBITDA at this point, for example, by quantifying the potential impact of a carbon tax based on the level of GHG emissions. With still unresolved questions at this point? What is the $ value of an emission? Should only scopes 1 and 2 be considered, or scopes 1 to 3, despite the difficulty of quantification implied here?

For investors who understand this potential, the environmental factor of ESG is expected to offer great stock returns for those who seize the first-mover advantage. Early recognition of the materiality behind environmental concerns over climate change, carbon regulation, and energy efficiency will help investors transform environmental legislation into opportunities.

Next, governance is perhaps the part of ESG which is the most familiar. Governance has been studied extensively and has been strongly linked to a corporate’s financial performance since the early 2000s. Much of the alpha generated from this factor may already be priced into the market due to its relatively early integration into mainstream investing.

That brings us to social, which is the most difficult to quantify and the least studied. For instance, how does one measure the ROI of gender diversity? There is not a clear agreement that this is possible. Most of the data in this category is static: number of women employees or minorities. At the same time, the question of employees’ health and happiness has long been linked to productivity and aspects like turnover and recruitment. We believe human capital and social considerations may well offer potential for generating alpha but establishing the clear link to the bottom line is still a work in progress.

Despite the financial metric issue, social has been gathering momentum. Venture Capital firms are increasingly incorporating social issues like gender diversity into investment decisions. In France, there is a push to get founders and VCs to sign gender diversity pledges. Meanwhile, in the US, I had breakfast recently with former U.S. Attorney General Loretta Lynch whose law firm, Paul, Weiss, Rifkind, Wharton & Garrison, has been hired by Amazon and Walmart to conduct diversity audits. She confirmed that these companies believe their financial performance is better when diversity is integrated and at the core of their culture.

These efforts will add even more data to the important work being done to better measure the impact of ESG on finances. But companies and investors can’t afford to wait for these new benchmarks to be developed. We are now in a new investment paradigm that requires changing the way we look at assets by taking a more holistic approach. If you’re an investor, you must accept that some things can be measured, and some things cannot be measured. As such, you need to take a whole new approach to risk. This strategy evaluates the financial as well as the legal and extra-financial risks that a company faces.

We recently introduced our Hybrid Growth Diligence product to deliver this more holistic view of companies and their resiliency in the face of risks. This new approach to investment is both multi-timescale and multi-dimensional. HGD combines backward looking indicators with financial, extra-financial, and legal KPIs to better define the business model in a specific vertical or sector. By analyzing these indicators, it’s possible to benchmark one company against another to establish their resiliency.

Moving Forward

Embracing an HGD mindset to evaluating assets is also about moving from playing defense to offense. Sustainable investing represents a fundamental change in the macro economy. The rise of the low carbon economy and the displacement of much more carbon intensive businesses are being driven by technology, market forces, consumer preferences, as well as the integration of DEI criteria.

That transformation is a massive investment opportunity for the PE and VC industries. These Private Market investors are well suited for these investments because they have a long-term horizon.

Still, there are some other near-term factors regarding ESG that need to be monitored.

In the US, several states have politicized ESG investment and sought to place limits on how such factors can be reported or considered. In Europe, the EU is close to finalizing new reporting rules around ESG that will require greater disclosure in the hopes of encouraging more investment around companies that emphasize their sustainable and social goals. And then there are the current macroeconomic headwinds which can always make investors and executives nervous about making big strategic shifts when there is already so much financial uncertainty.

Nevertheless, ESG can no longer be ignored. The world has changed in recent years. We understand much better the notion of systematic risk, whether it is a global pandemic or the planet burning. The systems needed to conduct the basics of business will collapse if factors such as social welfare, transparent governance, and preserving the planet are not addressed.

The best investors recognize this reality and will use this moment to change their thinking and identify the next generation of global winners whose resilient business models will lead the world through the next era of transformation.



Raphaëlle d'Ornano

Managing Partner + Founder D’Ornano + Co. A pioneer in Hybrid Growth Diligence. Paris - NY. Young Leader French American Foundation 2022. Marathon runner.