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Insight

Maximising ESG value creation

Simon Mendum Financial Sector Leader - US
Simon Mendum

Simon works in partnership with Financial Sector organisations to deliver ESG Advisory and EHS Transactions Advisory. Simon’s focus is driving EHS and ESG strategies that focus on value-driven actions and opportunities. In ESG and climate change advisory, Simon has successfully developed strategies to enhance and quantify value at mission-critical assets, with positive balance sheet returns. In EHS transactional diligence, Simon has a pragmatic business-issues based approach, to answer the critical questions related to the transaction under consideration, driving at the value consistent with the investment thesis.

ESG as part of your integrated risk management strategy

Investors, portfolio/asset managers, and business unit leaders must consider the ESG lifecycle and recognise their own ESG maturity as part strategic investment planning.

A successful ESG strategy encompasses all elements of the ESG lifecycle, balancing the differing priorities of individual business units, while driving a consistent approach to ESG at the corporate or fund level. The most successful approaches drive the ESG agenda from the top down, integrating ESG into early stage diligence, the value creation plan and investment committee approval, recognising vulnerabilities and building in the necessary actions to increase resilience and appropriately manage and mitigate risks.

The overall value driven by a successful ESG strategy results in a stronger exit position and improved multiples, increased operational efficiencies, a safer working environment, and when fully integrated, a more robust risk management strategy.

Essentially, a good ESG strategy is about recognising the values, opportunities and risks of tomorrow and operating your business as if they were in play today, to create long-term, enduring and sustainable value.

 

Diagram showing ESG Actions in Investment Lifecylce

ESG diligence

Critical to an effective risk management strategy, investment or acquisition targets should be screened for ESG risks and opportunities as part of the diligence process. The ESG diligence is often integrated into the EHS diligence if applicable to the transaction and should include benchmarking against market and portfolio peers and, if the investment proceeds, inform an ongoing ESG programme. Where a comprehensive ESG diligence package is necessary, and particularly at exit as part of vendor due diligence, SLR works with all applicable diligence streams to gather and package the ESG findings to provide an integrated, and more cost-effective solution, without unnecessary repeat of diligence.

Investment committee advisory

SLR takes a pragmatic approach to ESG risk management and value and importantly understands where such issues may not be material to the overall investment’s value creation strategy. However, in cases where there is significant opportunity and potential for otherwise unrecognised ESG value, SLR works with the deal team to integrate ESG into the investment thesis. Similarly, SLR’s ESG strategy advisory includes governance tools at the fund level to assure that ESG risk management is appropriately assessed and considered through the Investment Committee process, and fully aligned with corporate values.

ESG actions implementation to realise value creation

The key ESG value-drivers should be fully integrated with, not sit apart from, ongoing operational priorities and activities. This is where the rubber meets the road and where SLR can leverage its wide sector expertise to drive pragmatic, real-world and economically viable solutions to realise the opportunities to drive impact and quantifiable value. As part of the risk management strategy, SLR assesses corporate, business unit and site-level vulnerabilities to drive resiliency actions, focusing on mission-critical assets where risk may be greatest. This flexible approach ensures the most critical issues are dealt with first, rather than a single, one-size fits all approach often undertaken, diverting funds to the assessment of non-critical operations. 

Sell-side ESG positioning

Often overlooked at exit, vendor due diligence for EHS and ESG can provide significant value to the transaction, framing the value proposition and often removing the need for more onerous and often disruptive buy-side diligence. ESG improvements can be benchmarked against KPIs at entry, to demonstrate both the value created, the mitigation of risks, increased resiliency and sophistication of the business. Where longer-term investments can be made, future value can be modelled and used to help inform valuation.

Fund-level actions

At a corporate or fund level, an effective ESG strategy addresses the essential elements associated with board governance, internal data gathering, tracking and benchmarking, internal reporting and external/public disclosure. While strategies may vary by portfolio company or business unit, overall consistency in reporting is essential for external disclosure under various frameworks such as UN-PRI, TCFD, SASB, IRMA etc.

SLR has benchmarked various common ESG reporting frameworks and can provide the right strategy and approach for your business, tailored to fit the business first, and not the external reporting framework, while maintaining the minimum standards required for framework compliance.

In our experience, all too often the ESG strategy is governed first by the framework(s) to be adopted, and not by the needs, values and investment proposition of the business, resulting in a less effective ESG proposition. By focusing on the fund’s values, ESG drivers and portfolio businesses first, the ESG strategy can be developed and fully integrated with the overall risk management and value creation strategies, increasing the likelihood of a successful outcome.