Are you thinking of exiting your business, perhaps through a trade sale or private equity investment? You’ll improve your chances if you boost your ESG performance first.
As at the end of November 2015, according to the Deloitte M&A Index, companies in the UK were the most sought after targets in Europe, attracting $313 billion in mergers and acquisitions (M&A) investment from both Eurozone and overseas acquirers.
2015 was the biggest year for M&A since before the financial crash of 2007, and so it shows that investor and business confidence may have returned at last.
That might mean, for business owners looking to exit, that now could be a good time in the cycle to be considering that carefully.
But things have changed. As well as all the things you’d expect potential trade buyers or investors to look for (a strong order book, well managed cash flow, where future value will come from etc) they are also increasingly concerned with environmental, social and governance (ESG) factors – softer, non-financial yet still tangible measures that can have a material impact on business performance.
Look at VW. It had billions wiped off its value last year as a consequence of the emissions cheating scandal.
Because of that potential materiality, trade and private equity buyers and investors are increasingly likely use your ESG performance in putting a value on your business.
The Discounted Cash Flow (DCF) method is widely used to value businesses. Poor ESG performance could result in increases to the discount which has the effect of lowering a company’s valuation. Likewise, businesses with strong and proven ESG performance can benefit from lower discount rates being applied – thus boosting valuations.
Well, in a nutshell, because when thinking about parting with what could be substantial sums of money, trade and private equity buyers and investors simply don’t want to catch a cold. They want to de-risk the transaction as much as possible.
Glynn Williams, a seasoned private equity investor in the petroleum sector, says that businesses with a strong and proven track record of good ESG performance will naturally make themselves more attractive for acquisition: “Although, as investors, we may have a bigger appetite for risk, that doesn’t mean that we’re willing to put our capital at stake without safeguards.
“By demonstrating that good environmental, social and governance practices are culturally embedded within their organisations, businesses are better able to show that they represent a sound investment – providing additional reassurance to would-be financial backers.”
What you need to do
In March 2010, the United Nations Environment Programme (UNEP) and the World Business Council for Sustainable Development published the results of a study that attempted to better understand how ESG factors can be translated into sustainable business value. Their report identified a number of investor wants which include:
Companies should provide data on how ESG factors influence their operations and commercial performance;
Companies should provide a clear link between ESG factors and financial materiality in annual reports;
Companies should show ESG as a means to reduce volatility;
Investor-friendly language is a comparative language. ESG is only relevant if it can be compared to a competitor, past performance, or new market development;
Companies need to report more on the social inequities in the workplace, and inequities and lack of transparency in employee remuneration.
The recommendations for businesses are unequivocal: draw clear links between ESG factors, sustainability, financial performance and strategy.
This is echoed by research conducted by PwC, in which investment analysts said they like to see linkage between different elements of company reporting. Among those surveyed, 87% said that clear links between a company’s strategic goals, risks, key performance indicators (KPIs) and financial statements aids their analysis.
In essence, then, as a business owner seeking an exit or looking for a fresh source of investment finance, you need to find a way to evaluate your ESG performance and show how that improves your financials.
How to do it
At Remsol, we’ve developed a unique maturity model that we use to evaluate sustainability and CSR performance across up to 30 separate measures, codifying that performance as either Beginning, Improving, Succeeding or Leading.
We’ve constructed it under the over-arching ESG themes of environment, social and governance performance, under which we then assess things such as energy management, water consumption, waste and recycling and many more.
The output is a comprehensive report that’s packed with intelligence, actionable insights and recommendations on how to improve performance iteratively from where you start to where you could eventually get to.
It is a valuable strategic tool that can be used to identify ESG gaps that can materially impact on financial performance and, revisited annually, can also be used to measure progress.
Because of the way the evaluation works you start by completing a detailed online questionnaire, which we then follow-up with one or more telephone interviews and site visits to validate what you’ve told us and to test our assumptions so that the report findings are particularly robust: this is no desk-top exercise. The report is also structured in a way that means it can be easily integrated into your annual financial reports and made available to potential buyers and investors in a way that will help them interpret what it all means to them.
If you like, we can also host a publicly available copy online that all your relevant stakeholders can access and view.
Takeaways for business owners looking to exit or attract inward investment
If you’re thinking of exiting your business or leveraging in new sources of finance to help you grow, you need to better understand how your ESG performance can affect your chances of success.
Poor performance = lower business valuations and reduced investor confidence, and so you need to:
1. Evaluate your ESG performance, identifying and fixing weaknesses;
2. Track your performance and link it to KPIs and your financials;
3. Report your performance and show how it strengthens your financials.
Timing is everything. It makes sense to consider these actions at the very early stages of planning your exit strategy or investment and growth plans, so you have time to evaluate, understand and improve your ESG performance ahead of seeking buyers or investment partners.
Want to know more about our unique maturity model? Go here and register with us using the online form.