Over the years, private equity (PE) firms have found new and innovative ways of creating value for their portfolio companies, be it financial engineering, restructuring or bolt-ons and M&A. Moreover, the vast experience and expertise gained, generally and within specific markets, has enabled ever-reliable assessments of the best investment opportunities.
The concept of value has itself shifted over the years however, and today there are a multitude of new and emerging factors that must be considered at deal, during the first 100 days and beyond, creating the potential for new, lucrative opportunities, but also perhaps heightening risk.
In this series of articles, we will be exploring a few of the emerging factors in value calculation, starting with one of the more topical - Environmental, Social and Governance (ESG) and how to successfully embed these elements in your Value Creation Planning.
At the recent ‘Real Deals – Value Creation’ event, a common theme was the emergence of ESG as an increasingly important component to value calculation. One speaker, Helena Fagraeus Lundström, Head of Via Summa, Summa Equity shared the view that "aligning [United Nations] Sustainable Development Goals (SDGs) with corporate objectives when searching for investment opportunities increases returns and reduces risk".
This is echoed in a recent article by McKinsey, which reinforces how a strong ESG proposition makes financial sense, but the article also stresses the need for robust Value Creation Planning and strategy execution, stating that “even as the case for a strong ESG proposition becomes more compelling, an understanding of why these criteria link to value creation is less comprehensive”.
The growth in ESG investment is perhaps best signified by the changes in PE human resources. According to Private Equity News “Major players such as Blackstone, KKR, Bridgepoint and Carlyle are among many firms that have hired heads of ESG or responsible investment specialists to address the growing demand from investors.”
Rapid investment is being made across the industry to get ahead of the curve. Despite this, major challenges lie ahead and the difficulty of linking environmental or social initiatives to financial value remains, but the clock is ticking and ESG is already having an impact on the financial markets. Banks, for example, are increasingly reviewing the environmental and social risks when deciding whether to lend money to certain corporate borrowers. One report by Fitch Ratings quoted, ‘sixty-seven percent of banks screen their loan portfolios for environmental, social and governance risks'.
The question to PE Partners is increasingly moving from can we afford to invest in ESG, to can we afford not to?
Founded in 2007 Ambienta is one of the largest and most experienced sustainability investors. Their investment strategy is borne out of a belief that investing in sustainability-driven businesses delivers both financial returns and measurable environmental impact.
Ambienta invests exclusively in businesses whose products or services generate a Resource Efficiency or a Pollution Control impact and targets niche European SMEs driven by environmental themes.
Ambienta has developed an internationally-recognised ESG integration programme in its operations and culture. The programme systematically integrates ESG management guidelines and practices into day-to-day operations at both General Partner and portfolio company-level.
In the cases of Ambienta, and Summa Equity, the success of their value creation execution depends on the seamless integration of their ESG approach into all activities from deal to exit.
Despite the successes that have been realised already in PE through the recognition and application of ESG, there are still gaps in the market. LCP’s annual Responsible Investment survey concluded that "nearly a third of investment managers are not committed to systematically considering environmental, social and governance (ESG) factors as part of their investment process, across all asset classes".
The main factors for this reluctance include a lack of consistency of sources, quality and reliability of data and disparate ways of measuring and reporting - with funds currently using data from rating agencies and third parties to develop their own ESG valuation frameworks which are left open to interpretation.
UNTAP by EXM provides a single space for planning, orchestrating and reporting all your value creation drivers, enabling a complete view of the performance of each aspect of every portfolio company, including ESG. It also provides an objective assessment of execution for your value-creation priorities, giving you the confidence and strategic agility to act where performance is below expectation or value re-alignment is required.