Creating value from ESG

ESG is a sound strategy, not just a box-ticking exercise, according to a panel hosted by Inflexion Partner Richard Swann at the firm’s annual Portfolio Exchange. Private equity and its portfolio companies can be the vanguard of the movement by turning intentions into actions.

ESG has had a lot of press lately. Particularly the ‘E’, and particularly around the recent COP 26 Summit. Critics were as plentiful as they were vocal, and while it may be true that progress is slow, there is indeed progress – and that is something.

“There is a negative agenda painted in the media, but it’s not entirely the case and in fact it is counterproductive,” stresses David Picton, Senior VP of Sustainability at Alcumus, a tech-enabled risk management specialist. He attended the Summit and is upbeat about the increased awareness of ESG, from firms and governments alike. “There are new agreements on methane, phasing down coal and new national commitments. We didn’t get as far as we wanted, but we made progress.”

People are increasingly powering this progress, with the movement’s accelerating momentum observed by Uisdean Fraser, who founded low carbon engineering consultancy Synergie Environ in 2009. “No one was interested in carbon when I started the company. We were helping people to save money and save carbon but back then they were mostly interested in money. Now we see a clear and growing interest in saving carbon, as people say they’re tasked with it by the CEO. The time has arrived for the company I started 12 years ago.”

This sentiment around ESG momentum is echoed by Tom King, Practice Lead, Political due diligence of Global Counsel, an advisory business focused on politics, business and policymaking. “The ESG train has left the station and the question is where you are on the train – in the front leading, or in the back complying. You can’t go back in time and it’s not a static thing so whichever government you have in power, the agenda will be pushed.”


How (not) to do it


Tom advises against trying to do too much all at once: “What is best is to take a materiality lens and apply it to next five years – performance, returns, potential exit if you’re a private equity-backed company. It goes beyond immediate compliance and into where you want to be as a company. It’s great to be driven by grassroots but really you need buy-in from the leadership team.”

Getting this buy-in should be a carefully considered process, since it’s one thing to make a net-zero commitment, but another to demonstrate how you’ll do it, according to Doug Johnston, Partner at EY’s Climate Change & Sustainability group. “Not everyone will judge you by your ability to reduce emissions by 50%, so it’s about translating it. You need a business story behind the target you are setting. You need to say what it means for customers and translate the target into what it means for your stakeholders.”

Doug saw a lot of big commitments from big banks and asset managers towards net-zero at COP 26 but fears many are flying blind as they don’t have the information they need to make the right decisions to progress. “We need a lot more thought on what information helps investors make the right investment to make the biggest difference. Commitment is one thing, but there’s a lot more work to do.”

Tailoring actions with your own business strategy is a good start, according to David, who has driven this at Alcumus. “There’s a link between authenticity and purpose. If you spend time and money on ESG in tough economies, it needs to drive better reputation and have a rock-solid business case behind it rather than being a fear agenda.”


One step at a time

As with any new initiative, embracing ESG may seem daunting at first. “Often the person tasked with making carbon savings is like a rabbit in the headlights. They don’t know where to start and so they don’t do anything. I recommend breaking it into aspirational yet achievable bite-sized targets with KPIs to enable monitoring of progress and then you can build on that quite easily,” Uisdean advises.

These targets need to be challenging, change behaviour and have commercial benefit. Tom suggests considering these against where you want your business to be in a few years’ time: “Marry up some priorities such as climate change with other areas, such as supply chain diligence. For example diversify away from certain countries in supply chain. It’s bringing the opportunities and risks together to see the commercial benefit.”

Driving ESG needn’t – and perhaps shouldn’t – be a purely managerial duty. “Don’t be fearful of resourcing ESG. It may be seen as a development project embraced by your team, with a future leaders group,” David says. He continues, “It needs to be treated like any other commercial target and it should be very engaging for groups who want to do this. It brings them together, builds cohesion and makes the company better.”

External resource may help companies to move along their ESG journey. “It can be quicker and more effective to bring someone in from outside if they have done it many times across many sectors. You can achieve success and build the capability internally to take that carbon journey onto the next stage,” Uisdean says.

Looking ahead, progress will be reliant on leaders, enterprises and people. “There is a clear three-way link between government policy, business strategies and what individuals can do. There is a lot we can do and there’s a big role businesses can play,” David says, adding that it can drive revenue, manage risk, protect reputation, and comply with regulation. Doug is seeing the commitment move down the value chain suggesting SMEs serving large businesses will feel a lot of pressure to drive change. He concludes, “Don’t look at ESG as a strategy but how ESG underpins your own strategy. How can it drive your business forward, differentiate it and make a difference to your stakeholders?”