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MONEY, MEET MORALS

Can private equity firms have a purpose other than making money?

Bank notes on a clothesline
Reuters/Ueslei Marcelino
Cleaner cash?
  • Cassie Werber
By Cassie Werber

Cassie writes about the world of work.

Published Last updated This article is more than 2 years old.

Finance isn’t the first place most people would look for a strong sense of moral purpose—certainly not historically, or in popular culture, and certainly not since the 2008 financial crisis, which was the first time many people realized a badly designed investment product sold in one place could mean a person losing their home somewhere else.

But financiers have also, traditionally, managed to hold themselves aloof from discussion of the morality of what they’re funding: They are not producers, miners, extractors, or explorers, after all, just conduits that allow money to flow.

This is changing, though—for example with the voluble assertions by some money managers, like BlackRock’s Larry Fink, that there’s more to business than a single bottom line. Now banks, asset managers, and even private equity firms are beginning to certify as B Corporations, setting themselves up for judgment as companies that care not just about shareholders, but about governance, customers, employees, communities, and the planet.

Certifying as a B Corp means making a change to a company’s legal structure to make it accountable to those diverse entities, while the company also agrees to outside scrutiny of data related to the certification criteria, and to going through re-certification every three years.

B Lab, the nonprofit behind the B Corp certification program, is treading carefully. But it’s been granting certifications to an increasing number of large financial companies, and seeing greater interest in the process from the sector overall.

TowerBrook, a global private equity firm with $12.4 billion in assets under management, became the first company of its kind to secure B Corp status when it certified in February 2019. It was followed by Lombard Odier, a UK-headquartered Swiss private bank, the following month. A second private equity firm, Helios Investment Partners, announced its certification in January. “So we’re seeing mainstream, established financial services certifying, and we’re speaking to a bunch of others,” says Chris Turner, head of B Lab in the UK.

In fact, an analysis of B Corp registration data (the data is publicly available) shows that 9% of registrations over time are for financial services companies, making it the third-largest sector in the B Corp community. (The biggest category is “business products & services,” which includes consultancies, making up 38% of registrations, followed by “consumer products & services” with 26%, which takes in a large number of food and clothing companies.)

To date, a lot of the financial firms that certified, like most B Corps, were small. Data shows that about 95% of certified firms in the industry have fewer than 250 employees. The financial companies that became B Corps were often niche ethical investors, or community banks. In other words, they were firms that might already be expected to place other stakeholders at least somewhere in the same hierarchy as shareholders, if not on a par with them.

The number of certifications by larger firms, based on assets under management, is still too small to be called a trend. It might, in fact, be the opposite: a few genuine outliers which, confident they do things differently from the norm, want to make sure their own purpose doesn’t get lost in the increasing clamor other companies are creating as they try to convince the world that they care about the planet, its people, and their future.

A purpose consistent with making money

With $3.6 billion under management and offices in London, Paris, Nairobi, and Lagos, Helios Investment Partners focuses on companies across Africa, or with a strong connection to the continent. Co-founder Tope Lawani says investment decisions at Helios are based on the dual criteria of generating returns and furthering sustainability.

“We’re pretty clear on what our job is,” Lawani says. “We’re a fund manager, and at the end of the chain there sits a pensioner somewhere who has to save money towards a comfortable retirement…And to do that, you need to generate globally competitive investment returns. But at the same time… there are many ways of doing that, and some are better than others.” 

The firm’s focus on emerging markets, and specifically Africa, gives it a particular perspective. “One of the features of these markets, we believe, is that sustainability in those markets is actually entirely consistent with making more money,” Lawani says. The key to that in the markets Helios invests in, Lawani says, is to look microscopically at a business’s value chain, work out who it affects, and then analyze what they need. “The way you make money sustainably,” he says, “is to create businesses, or build businesses, where all the stakeholders have a reason to want you to succeed.” 

This was radical thinking back when Helios was founded in 2004 and, coming from a sector that’s been highly criticized for lack of ethics, it invited scrutiny. As the noise around purpose-driven companies generally grew, Helios went out in search of a structure that could ensure it remained distinct from the crowd. Lawani had heard of B Corp in association with Patagonia—one of the most well-known B Corps—a clothing brand with which he was familiar as a customer, and had followed as an investor back in the 1990s.

Helios, which has about 50 staffers, has always seen itself as “a purpose-led organization,” Lawani says. But he and co-founder Babatunde Soyoye began to see a risk of their message getting lost in a more diffuse—and potentially less rigorous—drive towards purpose, or its trappings. “In a world where the noise level is greater, and where everyone starts to say the same thing in the same way, there was an increasing danger of ourselves having that founding ethos dissolve into mere words and platitudes.” Lawani says. “We saw a risk…of the erosion of that fundamental purpose, which we think is a point of differentiation. And even if it’s not a point of differentiation, it’s important to us.”

In April 2019, Helios began seriously researching the prospect of certifying as a B Corp, working with a core team of about five people, who sourced the necessary data. The certification came through in November 2019.

B Corp benefits

Helios was the second global private equity firm to complete the B Corp process. In February 2019, TowerBrook, an even bigger private equity firm, with $12.4 billion in assets under management, announced it had certified. TowerBrook, which spun out of George Soros’s family office in 2005, says in its B Corp press release that it “invests in companies that can deliver profitable growth and make a positive contribution to society.”

“A lot of firms are concentrating on ESG [environmental, social, and governance criteria], but it’s difficult to assess whether you’re doing a good job or not,” Ramez Sousou, co-CEO of TowerBrook, tells Quartz via email. “B Corp is a standard by which we can measure ourselves.”

Sousou says that TowerBrook wasn’t jealous of its status as one of the only private equity firms to certify, and that the firm is actively encouraging its peers to register. “It would be a great outcome for us if the PE industry embraces the B Corp movement,” he says.

Certifying as a B Corp wasn’t an idea dreamt up by TowerBrook’s leadership alone. “The push for certification was driven by a broad group of people at the firm. That is the only way that it can work,” Sousou says. “Of course, there has to be a passion for this effort, and an ownership, from the very top of the firm (which there was), but it also has to be broad-based.”

Sousou didn’t say the process itself had changed TowerBrook, but he notes: “The assessment is a helpful measure of where we stand in relation to others and a pointer to particular areas for further improvement.”

By contrast, Lawani points to a number of ways in which going through the 200-question B Impact Assessment (companies have to score a minimum of 80 points out of 200 to comply) had altered Helios’ policies, mostly in relation to its own employees. These ranged from the office environment and wellbeing—measuring indoor air quality, buying plants, instituting a cycle-to-work scheme—to more material changes, like better support for mothers returning to the workplace and better breastfeeding support.

It’s quite possible there are other firms working towards certification behind closed doors—according to B Lab, 70,000 companies use the free B Impact Assessment in some way to measure themselves, though only about 3,200 have so far completed certification. “The thing about B Corp is that, in order to do it, you need to mean it,” Lawani says. “There are lots of easier ways, if what you want to do is tick a few boxes,” and in so doing convince a particular audience of your company’s purpose. 

An industry in flux?

Two private equity firms certifying isn’t enough to call a trend. But many would say it’s a radical departure for an industry which is frequently vilified as being particularly devoid of ethics, or at least worthy of general suspicion.

Lila Preston is co-head of the growth equity fund at Generation Investment Management, which was established in 2004 with sustainability as its remit and now has $25.1 billion in assets under management. As an old hand in the world of sustainability investing, Preston says that financial services as a whole has gone through a huge change in recent years and that Generation, which has been certified as a B Corp since 2015, prides itself on being a source of information for other financial firms aspiring to change.

“We talk a lot to fellow travelers. And I would say certainly in the past five years there’s been a marked uptick in the interest in things such as B Lab and B certification,” Preston says. 

Generation says it’s working toward a vision of “sustainable capitalism”—encouraging businesses that offer “products and services consistent with a low-carbon, prosperous, equitable, healthy and safe society, without borrowing current earnings from future earnings.” It’s a lofty goal, frustratingly far from being achieved. In its Sustainability Trends Report, Generation tries to assess the state of the union when it comes to sustainability, both “the steps forward and the steps back,” Preston says. 

Investors are putting more pressure on companies to act ethically through things like shareholder resolutions, she notes, while the investment industry as a whole is increasingly influenced by ESG criteria, and the standards governing those criteria are improving.  It’s not enough, but it’s progress. “What we would say is that this momentum is necessary but not sufficient,” Preston says.

“We should keep this sense of urgency,” she adds. “The fundamental upgrade to our economic system that can be achieved through sustainability disruption is significant.” 

Thinking ahead to the next generation of clients

Lawani has been working in private equity for 25 years (much of that time at TPG Capital, a big US-based private equity firm, where he fortuitously met Soyoye, his Helios co-founder.)

“I do think it’s become a better and more ethical industry,” Lawani says. “I think the scrutiny has made everyone, after some period of maybe resisting it…[realize] there’s no need to feel stuck in the shadows. As firms have become more successful they’ve institutionalized themselves in many ways, and become more cognizant of the societal impact of their actions.”

He also sees another change coming: The rise of the ethical consumer of financial services. After all, Greta Thunberg and her contemporaries will grow up to become savers someday.

“As the generations shift, you will clearly see the degree to which people care about where their money is going and what it’s being used for will only continue to grow,” Lawani says. “And so even if you didn’t believe it, if you’re behaving in a way which is not consistent with what your customer wants,  then you won’t really be in business.”

This story was updated with additional comment from Ramez Sousou at TowerBrook.