ESG Virtual Conference Summary – “The Value of ESG to the Financial Community”
Posted on October 29, 2021 | in ESG
Today, businesses around the world are being held to higher standards in Environmental, Social, and Governance (ESG). While some of it comes from a regulatory perspective, much is driven by investors. During the VelocityEHS ESG Conference, Blake McGowan, Director of Ergonomics Research at VelocityEHS sat down with Chloe Sanders, Head of ESG at CVC Capital Partners, a global leader in private equity and credit, to learn more about the value of ESG to the financial community and how CVC is integrating ESG into its approach when making investments.
Chloe works on CVC’s own ESG strategy, but she also looks at how CVC can support its portfolio companies as they’re working to create and improve their own ESG strategies. CVC’s goal is to provide superior returns to its investors, and one of the key ways of doing this is to build better businesses. In her role, Chloe sees a clear link between business and ESG — companies that manage their environmental and societal footprints well, generally perform better. While she feels we all have the responsibility to be stewards of the planet and the societies in which we operate, when it comes down to the dollars and cents of investing, ESG is a core part of the value creation and acts as a risk mitigant.
Below is a summary outlining the questions Blake and Chloe covered during the session. Visit the VelocityEHS video library to view the whole session on-demand.
Q1) For those who have a background in EHS, ESG and ESG investing may both be new concepts. What are some of the top things an EHS professional should know? Why is ESG so important to the financial community?
In the past, ESH and ESG were seen more as compliance exercises. Now, regulatory frameworks have shifted, and society is driving the need to move more quickly around sustainability. This gets investors excited because it’s creating huge opportunities for companies.
Additionally, ESG ensures competitive advantages in the marketplace when selling products and services, but it also comes into play when recruiting top-quality talent. People are excited by innovation in these areas and recognize the opportunities for efficiencies. This is important to investors because companies with fundamentally strong governance in these areas make for better, more sustainable investments.
To tie this together, Chloe introduced the concept of futureproofing a company. Using CVC as an example, she shared that their model is to invest a controlling investment in a company and hold it for 4-5 years (sometimes longer). During this time, the sustainability agenda will continue to evolve rapidly, so CVC needs to feel confident that as they’re making an investment in 2021, come 2026 they’ll still have a company that’s fit and agile in its sustainability strategies and ready to go to the next stage of its investment program.
Q2) For EHS professionals, what is the highest priority item to focus on now, what do ESG investors feel is the biggest element in ESG?
This can range depending on investors. CVC has investors all over the world, so materiality differs, but they look for trends. Two key things they’re seeing right now are greenhouse gas emissions and diversity.
With emissions, investors are making their own commitments around NetZero which means they will be looking for companies with high-quality data related to carbon. Plus, carbon applies across all companies regardless of the size or sector.
The other current focus is around diversity, especially at the board level, as it’s generally a good indicator of how a business views diversity throughout the entire organization.
It’s important to note, however, that every company is different. For CVC an important part of managing the risks and opportunities presented with ESG is identifying what’s material within each business. When CVC engages with companies in their portfolio that are just starting their ESG strategy, they encourage them to focus on a few key metrics where they have high-quality data available. Then, over time, they can increase the pool of data they have available on ESG.
Q3) What is an element of ESG that may not be as important right now for the investment community?
It depends on the company, but it comes down to materiality and data collection. When CVC is working with their portfolio companies, they may have discussions around water, waste, etc. While these topics are important in the context of certain companies at the material level, they might take a lower priority when CVC is looking at their entire portfolio. Anything not in the core set of KPIs can be a challenge for some investors and may fall down the priority list a bit.
Q4) Is private equity investing different than public equity investing regarding ESG? What are some differences?
The fundamental difference is the level of interaction. In private equity, it’s more of a hands-on approach; you work closely with the companies you’re involved with. Private markets may also come under scrutiny for not being as transparent, especially on data. Public markets have more established processes around reporting. There are increasing requirements for companies to report on various data points and they’re likely to come under more regulation around disclosure, especially in the EU.
In Chole’s role, one advantage she feels being on the private side at CVC is the ability to make an impact. They generally have a controlling stake in their companies and seats on the boards, so they can drive and create change through their influence and work in close partnership with their portfolio companies.
Q5) In the next decade when carbon emissions and diversity are rolling, what do you think will become the next high-priority items or areas?
Even 10 years out, carbon and diversity will still likely be front and center but there will also be more focus on the supply chain, driven by the availability of data. Take Walmart’s Project Gigaton for example. They want to remove one gigaton of carbon from the global value chain by 2030. To do this in a meaningful way, they’ll need to have full-on engagement with their suppliers to collect the data they need to understand where the hotspots are.
Another area is biodiversity. As we look for solutions and recognize constraints around the availability of land and the constant demand that humans put on the planet, there is a focus on biodiversity and what can be done to protect it. For companies with more complex supply chains, manufacturing, or creation of products along their value chain, this will become a larger part of their sustainability program.
Q6) What are some of the barriers to getting the data you need to make informed decisions?
Asking companies for their carbon footprint or diversity and job creation statistics only works if the data is tracked in the first place. One of the approaches CVC is taking to help with this is to ready companies by explaining what’s coming. Most companies need 18-24 months to build the correct programs and get the internal or external support they need to create high-quality data. Since a lot of the regulations are already present in Europe and the EU is disclosing what information is available and what information will be requested as part of regulations, CVC knows what’s coming down the line.
The other problem is the lack of common standards and benchmarking. There are hundreds of different data points companies can be collecting but investors don’t need all of it. The investment industry needs a set of common standards to bring the data to life and allow for benchmarking to bring meaning to it.
Q7) When it comes to investing, how many of your decisions are driven by data vs. qualitative analysis, or even gutfeel? How do you mix all of it when making a decision?
For some companies, if they don’t have the data, the focus is on qualitative information. They might be in the early stages of pulling together their strategies and not have data available. In these cases, EcoVadis can be a helpful tool because it’s not just focused on data points. It looks at management and management systems around sustainability whether it’s environment, labor, ethics, or supply chain procurement. While it is a scoring system, it still provides fundamental insights into how a company is managing its sustainability initiatives. For example, a company might have a huge carbon footprint now, but if you review the steps and processes they’re taking to manage it, you can get an idea of how they’re expecting the carbon footprint to change over time.
Q8) As an investor, what are some things you’re hoping to hear come out of the COP26 conference?
Within the business community, there is a lot of will. A lot of business leaders really want governments to come together and produce strong commitments which lead to enhanced frameworks and incentives. Then, the companies making commitments to sustainability can begin to reap the rewards. If the regulatory environment is supporting the things you want to do, it makes it easier for ESH professionals to push the agenda. Incentives are key for creating change.
Q9) How does the investing community encourage transparency and governance and try to avoid encouraging companies to engage in “greenwashing”?
Greenwashing impacts everyone at any level. It’s easy to over-promise 10 years down the line but fundamentally, it all comes back to having high-quality data. As companies face pressure to make commitments, they’ll also need to have the evidence to back them. They need data points they can measure consistently so they can set realistic targets and be able to measure against those targets. That is the fundamental way to deal with greenwashing. Companies just need to be clear and straightforward about where they are and the progress that’s been made because data will come under scrutiny, and if they don’t have the data, they won’t be able to back up what they’ve done.
Q10) As companies face pressure to identify stretch goals but also be transparent, what advice do you have for the C-Suite or ESG leaders on how to balance their stretch goals with expectations?
Take the time to ensure stretch goals are attainable within the business. Communicate internally and galvanize employees around what you’re trying to achieve because ultimately, they’re the ones who will help you achieve it. Also look at what can be done in smaller increments, what smaller goals can you set in the interim to work toward achieving that stretch goal? Then, back it up with regular reporting and show progress over time. This is a large part of a credible ESG strategy.
Q11) What are some of the human capital management issues that tend to be more material across the board?
Employee engagement is a huge part of any business. Addressing gender pay gaps and gaps between the C-Suite and other employees are also up for consideration.
For companies with more complex supply chains, it’s human rights within those supply chains. Businesses need more contact with their suppliers and discussion on how to manage risks within the supply chain.
Q12) What are some of the ways investors are trying to quantify human capital?
Employee turnover is a common metric, but it depends on the business. For example, hospitality has a high turnover rate, but that’s to be expected. In other industries, it’s expensive to attract and retain talent.
In general, however, human capital is a challenge. CVC is actually working with industry peers to create a set of common metrics in ESG to bring more meaning around data. Within this initiative, for human capital, they’re focusing on job creation, employee engagement, and health and safety, and making sure they’re all measuring the same metrics. Then, they can anonymously share their data, divide it by sector and create some benchmarking.
Q13) Does CVC use EcoVadis externally and is it part of your benchmarking strategy?
EcoVadis is useful in that it allows for benchmarking within the portfolio. It allows CVC to see hot spots and areas where companies might be a bit behind. Then, they can engage with those companies to help them improve. Looking externally, EcoVadis is helpful because it rates so many companies each year that it can provide benchmarking data on the management systems for an individual company as well as the sector they’re in. When CVC works with EcoVadis, their focus is to support their portfolio companies by looking at data that provides their companies with information on how they’re sitting within their own sector. That way, CVC can look at the portfolio as a whole and report to their investors, but their individual companies can also use the data themselves to understand how they compare in their sector, region, and around the world.
Q14) CVC announced they would invest in ESG forward companies. How much of that was investor demand vs. CVC saying it was the right thing to do?
It’s primarily the latter. CVC listens to investors, but it comes back to the concept of futureproofing (see Q1). Being able to pick the winners of the future by looking through the sustainability lens is a big part of future success. Investors understand that and are vocal about it. We listen to our investors, but we’re also the stewards of the capital who want to build a sustainable investment platform.
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