How ESG factors drive higher returns

In recent years investors have poured billions of dollars into assets that they consider socially responsible. But, according to a new survey by RBC Global Asset Management, less than a third of them are pursuing environmental, social, and governance (ESG) investing because they believe it can drive higher returns.

I believe those ignoring the opportunity are misguided. ESG factors can be a strong indicator of a company’s likelihood of success, and therefore a powerful driver of higher returns. That’s why my partners and I have incorporated ESG considerations into the core of our investment strategy at Auxo Investment Partners, the private equity firm we launched in October.

Ultimately, ESG investing is about recognizing that a company’s ecosystem is critical to its success; to ignore ESG considerations is to ignore risks and opportunities that have a material effect on the financial outcome of our investments. This is particularly true for the smaller, family owned businesses (less than $15 million EBITDA) where Auxo focuses its investing efforts.

While there are many different aspects of ESG — energy footprint, transparency, diversity, to name a few — I would like to focus on the one that we consider the most critical component for the businesses we invest in: people.

At Auxo, we believe the social considerations associated with providing people opportunities to improve their lives by finding fulfillment and opportunity in their work can serve a greater good. If we are successful, we create more jobs and more productive employees. If we create jobs, we create livelihoods, raising the quality of life for those families and their communities.

We seek to partner with companies that have significant growth potential, and we believe a plan for acquiring and retaining top talent will prove crucial to their ability to achieve and sustain dramatic growth.

So, when we acquire a company one of our first actions is to develop a talent strategy. We start with an organizational assessment that includes building a forecast for what the organization would need to look like after 30 percent to 50 percent growth, and identifying the talent gaps we’ll need fill either by hiring or by internal promotions. Often this can be a considerable number of positions — and in today’s labor market, that presents a challenge.

In western Michigan, the overall unemployment rate is significantly below the national average, and even lower yet for skilled and semi-skilled manufacturing. In many parts of the U.S., unemployment for skilled and semi-skilled manufacturing labor is approaching zero. In this environment, the companies that excel at acquiring and retaining talent gain a substantial strategic advantage.

So how do you build that excellence? In our experience, the companies that win in the labor market are those that treat their employees and communities as stakeholders and that apply serious efforts to creating engagement, opportunity and diversity. While we credit the managers of the companies we have worked with, some examples that have been successful for us in past include:

  • Diverse recruiting sources: Refugee programs, ex-offender programs and underserved minority organizations all provide access to oft-neglected labor pools and to talented employees that may prove highly loyal.
  • Community connections: Partnering with local schools to establish apprenticeship programs or with community organizations to connect employees with the community can extend the firm’s reach and increase its visibility to potential employees, broadening the talent pool and increasing retention.
  • Employee Development: A simple survey can uncover a wealth of valuable information about a company’s employees. One shop floor employee may be very happy to remain in their position long term, while another has aspirations of one day running their division. Maybe a third employee has worked in maintenance but was trained as a set up operator in a previous job. These kind of insights can help direct employee development activities, strengthen bench planning and ultimately increase productivity and retention.

Each of the above requires serious effort. Hiring a refugee, for example, requires leadership to ensure that the organization is culturally prepared to accept and work alongside employees that come from very different cultures and speak different languages. And none of this can be built overnight. But we think it’s worth the effort and the time.

In the long-term, the external benefits will accrue to our portfolio companies as well. They’ll gain access to talented, dedicated employees. They’ll gain loyal customers and the support of civic leaders. All of those things help fuel sustainable, profitable growth.

And that’s how incorporating ESG considerations creates value for our investors.

Jack Kolodny is a Managing Partner of Auxo Investment Partners. Mr. Kolodny has over 20 years of experience in investing, operations and consulting. He can be reached at

Photo of Jack Kolodny courtesy of Auxo Investment Partners