Connecting the dots
A demonstrable track record of improvement against material ESG factors strengthens business resilience in an age of climate change transparency and looming regulatory requirements.
Different people have different opinions about ESG, but one thing is clear, ESG is a journey, not a destination. We often hear from prospective clients who want to progress on their “ESG journey” saying: “…we do not want to be the leaders, but we do not want to follow either”, suggesting that there remains a perception that ESG represents a complex maze that requires considerable effort and extensive resources to navigate and integrate successfully across the business or portfolio.
An example of this complexity is a conversation six years’ ago with a private equity client as to whether it would be helpful to include ESG scope on a vendor due diligence assessment. My client’s concern was that, because ESG was not a focus during their investment period, such a report may portray their business in a negative light. We therefore agreed to undertake the assessment and have another conversation before the report was written. During our assessment we developed data tracking impact of improved decisions following a life-cycle assessment (LCA) for three products. We quantified that, the business had reduced energy/carbon intensity, slashed freshwater use by half, and made material changes to its operations, including waste generation. When these data sets were normalised against unit of production, there was a demonstrable improvement in business sustainability performance across the investment period. All of this was achieved without this business setting any formal ESG KPIs, rather these steps were taken because they were sound commercial decisions. A key point made here is that some businesses have started their “ESG journey” without realising it. Needless to say, the ESG section of that diligence report was published, and it helped create value for our client. The assessment also supported the business to formally start and convey its “ESG journey” by connecting existing dots that in turn identified avenues for further improvement.
Even the most forward-looking businesses will find it difficult, if not impossible, to address all ESG aspects at once, so prioritising is important. The key to success is materiality i.e., the understanding of which ESG aspects are most relevant to the business’ sector, geography, and overall operating context. The relevance of each aspect will be different for each business and, by no means does the determination of such aspects need to be a complex process. There are numerous resources available for example, the Value Reporting Foundation — a global non-profit organisation offering a suite of resources designed to help businesses and investors develop a shared understanding of how enterprise value is created, preserved or eroded; this organisation was formed through a recent merger of the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB)). The SASB Standards’ Materiality Map is another useful resource that can help to identify, assess, manage and monitor risks and opportunities for broad range of ESG aspects for your business.
Connecting existing dots through data collection and performance tracking develops the understanding that starts the perpetual cycle of identifying new opportunities for further improvement. The business case is clear, that a demonstrable track record of improvement against material ESG factors strengthens business resilience in an age of climate change transparency and looming regulatory requirements, plus it formulates and captures your potential “ESG premium” upon exit from the investment — according to 72% PE firms respondents to a recent EY survey.
Luckily, it is never too late to start your ESG journey!
Tomas is a Principal at Ramboll Environment & Health. He has joined Ramboll in 2016 and currently leads the UK M&A and ESG Advisory team within the global Compliance, Strategy, and Transaction (CST) Service Line.
Tomas has over 25 years’ experience in advising financial sector and corporate clients throughout the investment lifecycle on environmental, health & safety (EHS) risk identification, mitigation, transfer and ESG matters including strategic advisory across a broad spectrum of industrial sectors with assets located in over 40 countries worldwide. He has also worked with clients to assess matters relating to climate change resilience and physical and transition risks. The details of recent transactions Tomas has advised on can be found on Mergermarket Profiler.