Managing change is a vital component of business success. The financial crisis and the ensuing economic downturn starkly illustrated the need to adapt quickly to a very different market environment. But success is based not just on reacting to changed circumstances, but on proactive action to adapt to emerging longer-term trends and the ability to recognise the value creation opportunities they present.
Pressure for change
In the post-crisis environment there is a stronger focus on the need for good governance and transparency, but this is also part of the long-term trend for businesses to take greater account of the wider social and environmental impact of their activities. In a competitive marketplace, companies must increasingly focus on environmental, social and governance issues (ESG), which cover a wide variety of challenges ranging from climate change, water security and carbon regulations to human rights, child labour and obesity.
Government rules and regulations – for example, on environmental issues such as the Carbon Reduction Commitment or employee relations issues encompassed in the Human Rights Act and the Employment Rights Act – are an important driver for the adoption of best practice. But the desire for companies to pursue a more socially responsible business model is equally evident in the pressure for action from all stakeholders, including customers, investors, industry bodies and the media.
Value creation opportunities
It is human nature to take pride in setting a high standard of social responsibility, but it is increasingly clear that initiatives to achieve this goal also yield economic benefits. ESG improvement programmes create value in many ways. They enhance a company’s reputation, enabling better relationships with other stakeholders such as governments, suppliers, customers and the wider community in which the business operates. Growth may be supported or enhanced through the innovation and new products developed in response to unmet social needs.
Risk management can be improved by creating a sustainable supply chain, enabled by engaging in community development. Meanwhile, through improved environmental considerations, companies may be better able to attract and retain workers and the resulting higher employee morale raises productivity, reduces staff turnover and recruiting costs and thereby increases return on capital.
From principles to action
BC Partners believes that these social and financial objectives reinforce one another and, with a successful track record stretching back more than 20 years, is attuned to the need to evolve its business model and practices to meet the latest challenges. The company is, therefore, updating some of its business processes to ensure that both social and financial goals are met. In some instances this involves formalising processes that are already part of the company’s existing business practice, while in other areas new action is being taken.
As an initial step, in March 2009, BC Partners signed the UN Principles for Responsible Investment (PRI), which aim to help investors integrate consideration of ESG issues into both investment decision-making and ownership practices. The key concept is to invest in a manner that meets the needs of the present without compromising the ability of future generations to meet their own needs.
But responsible investment requires more than principles: to create value they must be backed up with policies and action. Furthermore, before a private equity asset manager can credibly encourage its portfolio companies to improve their ESG standards, it must first implement those principles within its own company.
Change begins at home
BC Partners has introduced specific initiatives to recalibrate the firm’s investment decisions to consider ESG issues and embed them in the firm’s normal decision-making processes. An ESG checklist has been developed to assess new investment opportunities, which considers, for example, supply chain issues as well as site-specific environmental, health and safety issues. To ensure awareness across the entire company, the firm’s associates undergo a specific training programme to enable then to analyse the ESG issues that arise in the due diligence process and further on in the investment process, ESG criteria are integrated into BC Partners’ final investment memorandum documentation. Using these memoranda to formulate their investment choices, the senior managers on the firm’s investment committee have ultimate responsibility for ensuring ESG criteria are adhered to in investment decisions.
The ESG agenda, however, reaches beyond a relatively narrow focus on the investment decision-making process. BC Partners has also introduced initiatives to meet its responsibilities in the workplace and to the wider community. Partners and employees must follow the letter and the spirit of the ethical standards set by the BC Partners’ Integrity Code of Conduct and the company has appointed an internal ombudsman to deal with instances of non-compliance. The company is also establishing the BC Partners Foundation, a UK-based charitable trust funded largely by employee contributions and a percentage of the firm’s earnings, which will have a broad-based remit for the disbursement of its funds to achieve a wide range of social objectives.
From investment to ownership
These same principles are extended to BC Partners initiatives to incorporate ESG issues into its ownership policies. For example, to promote transparency and accountability within its portfolio companies, BC Partners is already rigorous in its use of traditional governance procedures, such as board-level audit committees to implement the highest accounting standards. The firm also works closely with its portfolio companies to raise standards further through additional governance measures – such as setting codes of conduct and appointing internal ombudsmen – similar to those already introduced within BC Partners itself. The firm does not mandate the precise form that a portfolio company’s ESG policy should take, as individual circumstances vary widely, but over the holding period of the investment, portfolio companies are required to reach a similar standard of governance to BC Partners.
Reviewing the portfolio
Over the last six months, to enable BC Partners to understand the priority currently given to ESG issues by the management of its portfolio companies and the extent to which they have established actions to manage risks and realise opportunities, selected portfolio companies have been surveyed by questionnaire and subsequently interviewed. Out of a current portfolio of 17 companies, to date six have been analysed in detail. Four portfolio companies are at different stages of an IPO process – three of which have very recently been listed – which entails its own ESG commitments, while others were relatively recent BC Partners investments and will be assessed in the coming months.
In a diversified portfolio, including a distributor of frozen foods, an estate agency business, a gaming company and a fitness club operator, the range of ESG issues faced is very wide, but the process of surveying and interviewing the companies has served as an effective method to raise their awareness of these issues. All the portfolio companies surveyed agree that ESG issues will grow in influence over business operations in the next three years. ‘Consumer preferences’ in relation to ESG issues are the most common area of concern, followed by climate change, energy use and waste.
Meeting the challenge
The large majority of BC Partners’ portfolio companies are addressing ESG issues. While each company’s response is tailored to its specific circumstances, a number of common themes emerge. One theme is the need to establish responsibility for ESG issues as part of the governance agenda and some portfolio companies have recently appointed an Environmental Sustainability Leader to address external stakeholders’ concerns.
Educating customers and clients is another important area, both to overcome pre-conceived ideas and misconceptions and as part of the continuous improvement process. Responses range from conducting regular customer surveys and conducting brand appreciation studies, including gathering feedback online, through to product education programmes. For example, one company has launched an ‘eco-conception’ project to investigate the environmental impact of its representative products over their lifecycle, (including the environmental impact of suppliers) to show how they generate fewer carbon emissions than is perceived.
Most companies are looking at improving their energy efficiency. Specific means to address this issue include evaluating methods of using the wasted heat generated from air conditioning to meet or even exceed other energy requirements and maximising the efficient use of daylight to reduce artificial lighting needs.
The large majority of BC Partners portfolio companies are working on improving their people management processes to improve employee fair treatment and thereby improve staff retention. Specific measures that have been introduced include proper employee assessments, allowing staff time for volunteering, helping with access to schools (including free places in some countries) and programmes to promote equal opportunities in the workplace.
Conclusion
BC Partners’ portfolio companies clearly illustrate the multi-faceted nature of the ESG agenda, which requires a response borne both out of the necessity to address business risks and the opportunity to achieve value-enhancing eco-efficiencies. But to meet the challenge of achieving both social and financial objectives a company must clearly articulate its ESG principles and back them up with well-defined policies and actions – as BC Partners has done. Only then can responsibility be truly reconciled with returns.
