Following affiliate title Private Equity International‘s Responsible Investment Forum: Europe in November, we noted GPs were developing an ability to tie their ESG efforts to value creation in their portfolio. If our Agenda 2025 series is anything to go by, this looks set to be a key theme for the next 12 months.
“Large customers in the healthcare, tech and finance sectors now reach into their supply chains and ask companies to meet certain ESG requirements. For example, minimum EcoVadis ratings, Science-Based Targets (SBTs) or ESG metrics reporting,” according to Permira ESG head Adinah Shackleton.
Shackleton cited a manufacturing company in its portfolio as an example: 65 percent of the company’s customers by revenue had SBTs, which resulted “in significant customer demand for the company to set its own [SBTs]… $61 million of annual contract value was tied to 12 customers with requirements for carbon footprint improvements, EcoVadis or SBTs.”
Infrastructure manager Actis is also able to provide examples of sustainability and value creation going hand-in-hand. “Our digital infrastructure investment in Octotel, a fibre network operator in South Africa, is a good example of this,” said director James Magor. “We worked with RMB [bank] to structure an innovative 2 billion rand ($110 million; €110 million) social loan, to expand the network into underserved areas and provide free access to schools and hospitals. This lowered the cost of growth capital for the company.”
Other GPs expressed faith in ESG value-creation power, even if they did not provide specific examples. Diversity, equity and inclusion initiatives can have a positive effect on value, said Fiona Place, ESG consultant to SME investor Business Growth Fund: “Increasingly, we recognise that the labour market is being squeezed. Employees have more options available to them in terms of which companies they choose to work for, and so by placing this emphasis on hiring more diverse talent, we are providing opportunities within those companies to not just improve inclusivity, but also hire from a broader talent base,” she said.
For Schroders, ESG and value creation is most clearly visible within its BlueOrchard business, which focuses on impact investing in emerging markets, according to head of sustainability and impact Maria Teresa Zappia, where “by definition… ESG and impact play a crucial role in commercial value creation”.
Challenges remain
While progress has been made, there are aspects of ESG work that remain difficult to tie to improvements in a company’s bottom line. “There are other areas that are more difficult to quantify but no less significant,” said Magor. “For example, we’ve heard first-hand from buyers of our businesses that sustainability performance led to a higher valuation. In general, we’ve seen during exit processes that there is more competition for businesses that are recognised in their industry and region as a sustainability leader, and this competition drives up the valuation.
Ultimately, the relationship between sustainability improvements and value creation remains nuanced. General Atlantic sustainability head Cornelia Gomez said: “As a global investor with diverse investment strategies, the value-creation levers for our companies are highly specific to sectors or geographies, and we recognise that there is no ‘silver bullet’ solution to quantifying value creation through sustainability.”
