This article is sponsored by Cinven
How do you assess environmental, social and governance risks and opportunities in the due diligence phase?
Vanessa Maydon: In the pre-investment phase, the responsibility sits with the investment team, who assess where risks and opportunities lie on a company-by-company basis. That team will mandate external advisors or carry out additional due diligence as required before putting together the investment committee papers, all of which have a mandatory section to describe ESG risks, how these are mitigated and areas of opportunity. One of the senior partners that sits on the investment committee, meanwhile, also sits on the ESG steering committee, to ensure that there is continuity between these two forums. ESG is a critical consideration in the investment process.
Once the acquisition is completed, what guidance do you offer new portfolio companies and how do you engage on this issue throughout your ownership?
VM: Even before we acquire a business, we start to socialise ESG with the portfolio company. We are clear on our values and approach, and on the standards we expect them to uphold. We have a tried and tested methodology when it comes to ESG onboarding. We continue our engagement with management teams during our ownership where we conduct a thorough ESG assessment, taking all the reports gathered in due diligence, together with an ESG questionnaire that companies are required to complete. More recently this has been supplemented by a cyber-risk assessment.
We then work with external specialists, where necessary, to assess any vulnerabilities and set out practical actions and initiatives which are appropriate to the business. We also conduct a benchmarking exercise, looking at the peer group of a portfolio company to be sure we know what best practice looks like. It is a very collaborative process, and we make that clear from the outset. The businesses we invest in are often already doing really good work on ESG. What we do not want to do is come in as a sponsor and make ESG an onerous reporting requirement simply for our own purposes.
What are your reporting requirements?
VM: We have five mandatory key performance indicators. The first three have been in place for a number of years: greenhouse gas emissions; incidents of anti-bribery and corruption; and work-related health and safety incidents. More recently, we added the incidence of workplace grievances and gender diversity. We then also require companies to establish KPIs specific to their business, based upon those ESG topics most material to the business and each of their individual circumstances. In addition, each portfolio company must have an ESG policy and a non-Cinven board member with overall responsibility for ESG, so that we can get the reassurance we need that this has been mandated, and performance is monitored, from the top.
Matthew Sabben-Clare: Vanessa’s point about collaboration is really important. Ultimately, the portfolio company has to own its ESG development because that will enable it to take this forward in the long term. If we are going to support sustainable change, responsibility must lie at the portfolio company level. At the same time, it is a two-way process. We see examples of very strong practices that we can learn from ourselves and help other portfolio companies to apply. When it works well, both teams are learning.
How is ESG responsibility structured within Cinven itself?
MSC: We are clear that ESG strategy is a topic that sits with the executive committee. This is not something that is delegated down the firm. We also have a portfolio review committee, that has oversight of ESG. Yet ESG is, by its very nature, cross-disciplinary. We therefore have a cross-functional steering group that meets regularly to review progress in detail.
How has covid-19 impacted the way in which you engage with portfolio companies on ESG?
VM: When covid-19 first started to emerge, our portfolio team introduced weekly, and later monthly, covid impact assessments for all portfolio companies. Clearly, those assessments targeted impact on financial performance and resilience. But, very early on, a specific ESG assessment also took place which covered everything from health and safety to return to work strategies, PPE provision, adaptation of workplace policies and the extent to which businesses were equipped to deal with those things.
A little further into the pandemic we also sought to understand the implications for employment, including redundancies and reduction of working hours. In particular, we focused on how these issues were being communicated to staff. Other areas of attention included IT resilience and cyber vulnerability, supply-chain risk and crisis response plans. We were constantly capturing that information to see if there were areas where we could provide assistance and share information on good practice. Where we saw positive examples of staff redeployment, employee engagement or community support, for example, we disseminated that through the portfolio.
What challenges are associated with embedding ESG in such a large and diverse portfolio?
VM: The first is resource. Trying to get your arms around the sheer number of portfolio companies which we invest in across multiple industries and geographies can certainly be challenging. However, as Matthew says, we have a strong cross-functional team and work with external advisors on areas where technical expertise is required. The scale of some of our transactions also brings challenges, in that we may invest alongside other sponsors or co-investors, each of which could have a slightly different approach to ESG and ESG reporting.
Something that has been incredibly important to us is to ensure those sponsors are fully aligned so that we are not going back to the portfolio company with duplicate requests for ESG information. We have recently spent more time working with co-investors to be clear about who is leading that workstream, what information is required and how that is going to be progressed as efficiently as possible.
In what other ways has your approach to ESG evolved over time?
VM: The inclusion of the cyber-risk assessment at the outset is one of the newer developments. We are also looking more closely at climate change. We conducted a one-off climate risk assessment of portfolio companies in 2019, looking at how a shift to a lower carbon economy could affect financial performance. We are also discussing whether to introduce that as part of our ESG onboarding. Diversity and inclusion is another area where we are spending more time.
MSC: We have done a lot of work over the past few years on our own diversity and inclusion approach as a firm. We are now turning our attention to what we can do at a portfolio company level to help promote diversity and inclusion. Many of the companies we work with are pretty sophisticated in this area, but it is uneven. As with other aspects of the ESG programme, we share best practices between businesses where we can.
What role does regulation play in helping define your ESG strategy?
VM: We have to acknowledge that for a lot of our portfolio companies, as well as for Cinven itself, the requirement to report on ESG topics is growing. The regulation coming out of Europe is full of acronyms including TCFD, SFDR and NFRD. In the UK, you then have the Modern Slavery Act and gender pay gap reporting. We continue to work with portfolio companies to support them where needed in meeting these regulatory requirements but, back to Matthew’s point, the company itself needs to own this.
Why is it so important to get ESG right as a financial sponsor?
MSC: I think there are three main reasons. First, we are investing money on behalf of large institutional fund managers and they have clear expectations that we invest that money responsibly. Second, investing in businesses brings its own responsibilities. In many cases, those companies are large employers with major local – and sometimes international – footprints. It is important we contribute as a shareholder in a positive way, working with companies to help them act responsibly within their own communities. Lastly, with respect to the investment process itself, we see ESG as not only part of our overall risk management programme, but also as part of our value creation programme as well.
How have the ESG challenges and opportunities that you face as a firm changed over the years? Are there new areas of focus on the horizon?
VM: ESG has changed unbelievably over the years from the perspective of the level of attention that it receives. That is a real positive. Meanwhile, the events of 2020 – the covid pandemic, of course, but also the rise of movements such as Black Lives Matter and growing awareness of diversity issues – have forced ESG even higher up the agenda.
One area where we are seeing focus grow is on the ‘S’ in ESG. Historically, it has been far easier to understand environmental risk factors and opportunities, as well as the governance aspects within a business. By contrast, it has been far harder to understand social factors and to set out practical ways to make improvements. However, we recently started working on a research project with the Institute for Sustainable Leadership at Cambridge University. We are working with them to develop a framework for measuring social initiatives and outcomes in our portfolio companies. There has also been significant input from our peer group of GPs who are helping inform what good looks like, and we would certainly hope to share the results of this work with those GPs as well.
Vanessa Maydon is corporate affairs director and Matthew Sabben-Clare is partner and chair of the ESG Steering Group at Cinven