In her paper, “Integrated Value–A New Private Equity Model for Driving Value Creation,” adapted from an article published in Private Equity International, Diana Propper de Callejon, a General Partner of Expansion Capital Partners LLC and a member of Capital Institute’s Board of Directors, reports on the emerging opportunities for investing in sustainability that her venture capital firm is accessing as it identifies the “next wave” companies that are truly embedding sustainable practices into the core of their business models. (In an upcoming Profile we will talk with Propper de Callejon in depth about her personal journey from clean tech investor to integrated value investor.)

In describing the first phase of the evolution of corporate sustainability practice over the past 30 years, Propper de Callejon notes that companies tended to define sustainability narrowly and somewhat defensively, with a focus on complying with environmental regulations and with reputation management. In a second wave, companies began to view sustainable practices somewhat more opportunistically, as a way to either reduce costs (by implementing energy efficiencies, for instance) or as revenue generators along discrete product lines (renewable energy or other “clean” technologies, for example). In the third wave, she reports, a new generation of private companies are, from inception, committing holistically to a corporate vision of “continuous improvement in environmental performance and social impact…as a primary driver of innovation and value creation over the long term.” The latter companies see this commitment as inextricably linked to their position as industry leaders and as fundamental to their long-term competitive advantage.

Investing in these “high-performing, integrated-value” companies offers “a compelling investment opportunity, especially for long-term, values-aligned financial partners that can nurture, strengthen, and expand this new model of value creation,” says Propper de Callejon. She goes on to describes her own firm’s strategy for integrated value investing: first identifying lower-middle market companies that “demonstrate the capacity for continuous improvement and strong growth” closely linked to their integrated value business models. ECP then secures “meaningful” ownership stakes in these companies and works closely with management to strengthen their sustainable business practices, and, in some cases, to innovative new business models. ECP also helps management address a more “technical challenge,” developing an integrated set of metrics and reporting systems that link, to the extent possible, sustainable practices with financial performance.

The next step for Propper de Callejon is to explore an investment vehicle to support these “next wave” companies over the long term, giving them the time they need to realize the value of their sustainable practices without undo short-term pressures. This approach, says Propper de Callejon, will have “a greater likelihood of maximizing exit returns based on market dynamics and company’s lifecycle rather [offered by] the normal limited life of a private equity fund.”—Susan Arterian Chang