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"Great business offering real assistance to clients"

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By Jane S.

Editor's Note: April '24

The Case for Ethics in Business

Ethics while not a dirty word in business, has some way to go to rehabilitate its reputation in the corporate community. With consumer behavior shifts and tighter government regulation there is a business case to be made for putting social, environmental, and ethical considerations at the heart of business today.

The category is only set to expand as the purchasing power of the Millennial generation grows. We are currently in the midst of the largest transfer of wealth in the history of humanity, as baby boomers and Gen X’ers pass on their capital to their children.

Study after study has found that Millennials prefer to do business with corporations and brands that demonstrate pro-social values, emphasize sustainability and practice ethical business standards. Indeed, a survey found that nine in ten would switch brands to one associated with a cause. Investors ignore this preference for ethical brands at their peril.

There’s also a talent aspect. It is becoming increasingly difficult for businesses to hire and retain the best young talent if they do not have a clear and defined wider purpose. More and more young people want to work for companies whose values match their own and whose purpose they believe in

Private equity, and the investment community in general, has been taking note. Since the introduction of The UN’s Principles for Responsible Investing charter in 2006, over 1,000 asset managers have become signatories. A PWC survey of the PE industry in 2016 found that 83% of firms now have a responsible investment policy and private equity has begun to integrate social impact and sustainability concerns into the deal cycle.

The pros of this are clear, and there are obvious reputational and regulation hazards if it’s not handled right. Importantly, government regulations are likely to become more, not less, stringent in this regard. Equally there is a growing interest among the LP community in responsible and sustainable investing. Asset managers representing $32trn, 15% of the world’s total investable assets, have a responsible investment policy while 46% of respondents to the PWC survey said that a majority of their LPs are interested in responsible investment, up from 21% in 2013.

The growth of new accounting techniques, and in particular the development of social impact auditing has allowed for the quantification of non-financial value. Investors under pressure from consumers and governments to yield impact returns now have an evidence-based metric to inform their decisions and investment strategies, and to measure the success of their choices.

Private equity firms making consumer investments are in the middle of a two-sided process. On the one hand, customers are growing increasingly concerned with the provenance and sustainability of the products they buy and on the other, an increasingly large body of LPs are moving to invest in strategies and managers that priorities’ ESG and social impact.

Obviously, a business can’t rely on values alone to attract consumers – the classic foundations of great product, market knowledge and customer service remain absolutely essential. But, in a crowded market filled with consumers ever more distrustful of traditional marketing techniques engaged in a constant search for authenticity, values-based branding and genuinely sustainable practice has a clear business case to be made.

Across the industry, consumers and LPs alike are starting to agitate for responsible investment practices in consumer companies with social impact. The shift may take several deal cycles to truly make itself known, but the trend is clear. The ethical value of ethical investing has always been evident – what recent years have increasingly shown is that there’s business value too.

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