Cinven: Making a climate impact with industrials investing

This article is sponsored by Cinven.

In 2021, funds managed by Cinven acquired Lonza’s speciality chemicals business alongside Bain Capital Private Equity. Cinven partner and head of industrials Pontus Pettersson and Laura McMullen, Cinven’s interim ESG director, join Arxada’s head of global quality and sustainability, Michael Burness, and global sustainability senior manager Marilyn Johnson to discuss how they have been working together to develop Arxada’s ESG strategy.

Can you start by telling us about Cinven’s climate strategy and how it has been developed?

Pontus Pettersson: Cinven’s overall aspiration is to be best in class in terms of ESG, and that includes climate impact and reducing greenhouse gas emissions. This has been a longstanding focus for the firm, and it has evolved significantly in the last few years.

We have built an ESG capability internally and articulated our ESG strategy as an extension of our broader business strategy. We assess these issues thoughtfully when we make investments. We then seek to develop a strategy for portfolio companies and improve all aspects during our ownership period.

Laura McMullen: In 2022, we developed our climate strategy, which focuses specifically on decarbonisation. The overriding philosophy is for all our portfolio companies to have specific targets and plans in place to reduce their carbon emissions aligned with the Paris Agreement – that includes Scope 1 and Scope 2 emissions, and often Scope 3. Cinven as a firm and several of our portfolio companies have set, or are pursuing, science-based targets.

How does this work through the investment process?

PP: ESG is an integral part of every investment decision we make, though its significance and the nature of the issues vary by company. I lead the industrials sector team, and manufacturing tends to have a degree of environmental impact, so those deals often have a significant climate dimension.

For example, we completed the acquisition of Thyssenkrupp’s elevator technology business in 2020. We are making good progress on carbon emissions, but the most immediate ESG focus is safety. By comparison, we invested in Arxada in 2021, where greenhouse gases and other emissions are a substantial area of focus, alongside safety.

At Bayer Environmental Science (now known as Envu), acquired in 2022, emissions are less of an issue, with the focus more on potential externalities associated with the use of the products, which aim to manage pests in a sustainable way. We work to ensure best practice is used, considering both environmental and biodiversity impacts.

When we make an investment, we investigate these issues in depth alongside our specialist ESG colleagues and third-party advisers. We lay out the issues, risks and remediation strategies to our investment committee at the outset. In 2022, we established a new Investment Selection Framework that categorises investment areas for Cinven from an ESG perspective as either excluded, for further consideration in greater depth, or included, where we see less significant issues. That has been socialised across the firm and forms an important part of our investors’ due diligence.

Once we invest in a company, we spend the first few months refining our value-creation plan with the management team, and that includes a broader ESG agenda with emissions targets and a strategy for reducing emissions over time.

Can you tell us about Arxada as an example, from due diligence pre-acquisition through to today?

PP: Arxada was previously part of Swiss pharma and life sciences group Lonza. Its heritage was as a chemicals company, and some of the units that we acquired were key to that heritage.

We signed that transaction in February 2021 and completed that summer. We have since made two significant add-on acquisitions, creating a global business with approximately 3,800 employees, 16 research and development centres and 26 manufacturing sites.

Arxada operates a substantial plant near Geneva, Switzerland, that has historically been a significant emitter of nitrous oxide (N2O), which is a potent greenhouse gas but not a health hazard. We identified during due diligence that the company was looking at a solution, which was a catalytic converter, and that was installed at its Visp facility in October 2021. That has reduced the plant’s N2O emissions by more than 98 percent and has reduced the total N2O emissions of Switzerland by 1 percent.

Michael, how would you describe Arxada’s climate strategy ahead of the Cinven acquisition?

Michael Burness: As part of Lonza, we captured environmental metrics and safety metrics on a regular basis, but we didn’t have our own focused strategy on climate or environmental management. We were tracking everything as part of the wider business; however, we didn’t have a focus on doing much with data outside of addressing the N2O issue.

How did Cinven approach sustainability and ESG conversations with you, and when?

MB: The deal with Cinven closed in July 2021 and we became Arxada in October that year. We still didn’t have a focused environmental and ESG department, but we had commitments in sustainability-linked loans as part of the acquisition. In February 2022, I was appointed to lead global sustainability for Arxada and that is when I started interacting with Cinven’s ESG director. That began with a materiality assessment, and then we began working closely to get things moving and we have done that ever since.

Marilyn, how did you arrive at the decision to install the catalytic converter at the Visp facility, and why?

Marilyn Johnson: That process had started in 2019, so there was work underway ahead of the acquisition. The driver was largely reputational – Lonza had a big presence in the valley and saw this as the right thing to do. The catalytic converter was up and running from October 2021 and the impact has been remarkable.

What difference has the installation made to the business and how has the company’s approach to climate risk changed?

MB: The broader perspective is that we learned we had the knowledge internally to look for the next challenge and start identifying other opportunities to make a difference. We started looking at waste from that site, for example, and identified more than 300 different waste streams and how we might address them. One issue was we had a lot of wastewater that had a high waste content, and we were sending that to an incinerator. We have now found a way to take waste out of the water, which means we can send that water to the municipal treatment facility and the amount of waste generated has gone down significantly. That has also created cost savings.

MJ: The N2O project was a jumping off point for Arxada to look internally and see that we have a lot of talented people, and we can look at these things and start making changes. We are now rolling out the same approach to all our facilities and broadening our outlook, with the full backing of our senior management team and our private equity owners.

As well as being the right thing to do, that process has created cost savings through increased efficiencies. Customers are also looking at their supply chains and carbon footprints, so there are a lot of benefits to reducing your emissions and addressing the impact of your whole product.

What other ESG topics are prioritised at Arxada and other Cinven portfolio companies?

PP: A topic that is particularly important to me personally in the industrials sector is employee safety. Many of the processes we are involved with are inherently dangerous if not done properly, and of course we want all our employees to go home safe every day.

One of the Arxada facilities had suffered a fatality some years before our acquisition and so we have also made safety a priority. We hired a safety solutions consultancy and put this at the top of the board agenda, requiring in-depth reports on any incidents and creating a reporting system that encourages employees to report incidents and situations that could have resulted in incidents. That way we can try to develop preventative measures to reduce the number of incidents, especially serious incidents.

All our companies also have diversity and inclusion targets that we track closely at the board, senior management and middle-management level, as well as in the population as a whole.

How does your ESG strategy create value for companies?

PP: We see it creating value in three ways. First, increasingly society taxes companies that have negative externalities, so by removing those we save costs. Second, more customers now care about the emissions profile of the products they buy, so by reducing emissions companies can do better competitively and therefore prosper. Third, the willingness of investors to take significant risk in this regard is reducing, so in terms of valuations and exit, this is also very important.

What lessons have you learned so far about strategies on decarbonisation and setting reduction targets?

PP: The nitrous oxide scrubber at Arxada is an encouraging story because the financial investment required was not that large, but the impact was massive. That filled me with hope that maybe there are many other examples across the economy where reasonable adjustments can have significant impact.

The bigger-picture challenge for European industrials is that we need to compete in global markets, so we need to tackle this in a coherent way. What doesn’t make sense is imposing a lot of cost on European industry, making it uncompetitive and forcing facilities to relocate to places with lower environmental standards. In some instances, the costs are material and there is a question over whether customers are willing to bear them.

LM: Carbon accounting and the associated data collection also remain a challenge. Still relatively nascent, it’s a work in progress across the globe. We need to continue to get better, and that is true for most companies and
most organisations, but we are really turning a spotlight on these issues now.