Cinven: Portfolio engagement supports ESG progress

Private equity firms and management teams can work together to develop relevant ESG strategies and targets, say Cinven’s Allegra Day and TK Elevator’s Dr Paula Casares Medrano

This article is sponsored by Cinven.

In July 2020, funds managed by Cinven completed the acquisition, with Advent International, of thyssenkrupp’s elevator technology business, TK Elevator. Here, Allegra Day, ESG director at Cinven, and Dr Paula Casares Medrano, head of ESG at TK Elevator, talk about the ESG journey the two have been on since.

How does Cinven embed ESG into its investment processes and value-creation plans?

Allegra Day, Cinven

Allegra Day: ESG is a strategic priority for Cinven and is core to its investment process. This includes how Cinven works with its portfolio companies like TKE post-acquisition. ESG is part of our culture and is everyone’s responsibility, alongside other investment considerations.

We start thinking about ESG in origination, where sustainability trends inform to some extent the development of our investment strategies and origination opportunities. As potential deals advance, we have an ESG policy with which investments must align.

ESG is part of every due diligence process. We have formalised our approach over the last few years, so we do a deep dive across different dimensions of ESG based on what is material to the business and based on industry, geography and company-specific considerations. In the case of TKE, ESG-specific due diligence was undertaken with support from an external adviser.

Our post-acquisition value-creation approach further interrogates the pre-investment ESG diligence findings, validates them, and builds on them as the Cinven team engages with the company on specific ESG risks and opportunities, especially those core to the business strategy. To inform this, we do a comprehensive ESG assessment post-acquisition that enables us to baseline the company and identify the gaps and strengths to build on. This assessment incorporates as standard specific climate, cyber and governance assessments.

The Cinven team develops a value-creation plan with management, fully reflecting that ESG is a key lever within the VCP. In the case of TKE, what came out quite strongly was the importance of decarbonisation, which TKE had already begun focusing on and Cinven fully intended to support. Safety was also a key priority – as was the governance part, which enabled TKE to become a signatory of the UN Global Compact only seven months after the carve-out from thyssenkrupp. Overall, we found a lot of good initiatives in place, including in human capital and diversity.

TKE is a leading player in ESG in its industry. Equally, things are changing quickly and there is always an opportunity to discuss what more can be done and how Cinven can help support and accelerate this. Overall, we feel that we are on a good track here, which was also confirmed by a recent positive rating from research firm Sustainalytics, where TKE topped a global ESG ranking of more than 500 machinery companies.

In the case of TK Elevator, what steps have been taken to address decarbonisation, and how has that process been aligned to science-based targets?

Paula Casares Medrano, TK Elevator

Paula Casares Medrano: We are doing a lot on decarbonisation, which has been a focus for us over the past few years, starting when we were part of thyssenkrupp. The approach back then was more around energy consumption – we had a group-wide energy efficiency programme and each year we committed to certain energy efficiency gains.

In June 2020, we started to define our own ESG approach and defined our first climate targets – aiming at a reduction of our Scope 1 and Scope 2 emissions by 25 percent by 2030, and 50 percent by 2040, from a baseline in 2019. Our well-defined approach enabled us to make it to the CDP A-List only four months after becoming a stand-alone company and we are very pleased that we were able to repeat this accomplishment in 2021.

The CDP ranking showed us we were on the right path, but we knew we had more to do. That is why we joined the Business Ambition for 1.5C initiative and committed to achieving net zero by 2050. As part of this, we are currently reviewing our Scope 1 and 2 reduction targets and working on the definition of our Scope 3 targets. All of these will be verified by the Science-Based Targets initiative to make sure they meet the criteria of the 1.5C scenario.

While continually challenging our targets, we are also taking the necessary actions for their realisation. As one example, in the last fiscal year 2020-21, we have increased the share of renewable electricity across our global operations from 1 percent to 45 percent and are aiming to achieve 100 percent renewable electricity by 2030.

AD: At Cinven, we have been thinking about our own approach to net zero and decarbonisation, and we kicked-off a programme last year to focus on that. From 2022 onwards, we will be working with our portfolio companies on their decarbonisation plans, aligned with science-based targets where possible. TKE is one of the most advanced companies in our portfolio, so we will look to share its approach and what it has learnt in the process to help other portfolio companies.

What kind of initiatives have been introduced at TKE around safety, health and welfare, and diversity and inclusion?

PCM: Safety has always been a top priority for us. That covers the safety of the people who use our products (lifts, escalators), but also our employees and subcontractors.

Our ultimate goal is zero accidents, with numerous activities to achieve this ambitious goal. We have strict regulations in terms of occupational safety in place for our employees, but also subcontractors, and control them stringently. Violations of these requirements are not being tolerated. All our employees and subcontractors, whether office or shopfloor workers, undergo appropriate and regular safety trainings. At the moment, for example, we are conducting an internal safety awareness campaign.

For us at TKE, it is clear that every accident is one too many and we do everything we can to prevent them. In the last five years we have made significant progress and achieved a reduction of the accident frequency rate around 50 percent, and we target to achieve a further 10 percent reduction every year. As a market and innovation leader we see our responsibility not limited to our company, but promote safety within the elevator industry as one of the co-founders of the Global Elevator Safety Forum – an industry-wide platform with a common goal to achieve zero fatalities.

When it comes to diversity and inclusion, we think of diversity as a part of a broad approach, covering much more than gender diversity. We are an international company operating in over 100 countries and are proud of the variety of nationalities working for us. For example, at our headquarters in Düsseldorf we employ more than 30 nationalities, enriching our corporate culture through their diverse backgrounds.

On gender, we are promoting diversity by ensuring women can develop their careers to their full potential at TKE. We have a target for 30 percent of our senior leadership team to be women by 2030; in 2020 that figure was 20 percent.

How is ESG progress tracked at TKE and more broadly across Cinven’s portfolio? What impact do you see these initiatives having on performance?

AD: On gender diversity and with other mandatory ESG KPIs we require our portfolio companies to report on, we track these with TKE (and other portfolio companies) on a quarterly basis. We also encourage portfolio companies to set their own ESG-related targets.

Cinven continuously reviews its portfolio company ESG KPIs to align with best practice, such as the recently launched ESG Data Convergence Project, to ensure data points are useful to a broad range of its stakeholders, including its investors. Cinven’s portfolio review committee and ESG steering committee review the performance of each portfolio company every quarter against ESG KPIs and any targets as part of our broader portfolio review processes, so we analyse and interrogate the data closely.

When it comes to linking a company’s ESG approach to performance, there are now plenty of examples in the market where strongly performing companies, from an ESG perspective, are significantly more attractive to investors and, as a result, commonly attract a higher rating. The clear case of the effect of significantly improved ESG on the overall valuation of a private equity-backed business at exit is not yet evident – as there are several factors that drive strong performance including ESG.

However, we now regularly see examples where businesses with strong ESG credentials outperform companies that overlook ESG, particularly in the public markets. As a result, ESG is key to our exit planning.

Good ESG is central to any business plan, where it can drive product innovation, sales growth and improved profitability. At Cinven, we believe ESG initiatives, such as those TKE is focused on, make a huge difference to a company’s competitiveness, market reputation, new business development and customer engagement, as well as financial performance over time.

PCM: As with all other KPIs at TKE, we track our own ESG-related targets constantly and report them to our sponsors on a regular basis. For us, it is important that it is not just about setting a target for the next 10 years and then moving on, you need to regularly review and update these because things are changing fast. You need to keep your targets well defined, visible and relevant, and reporting those KPIs to sponsors regularly works as a good reference point for us.

Working together: at Cinven portfolio company TKE, ESG is embedded across the business

How does Cinven engage with management teams to tackle ESG risks and opportunities?

PCM: For us, this has always been a learning process, which started from our carve-out from thyssenkrupp in 2020. When TKE was part of thyssenkrupp, sustainability was a topic we had on the agenda, but it did not have the relevance to the business that it has today. We used the momentum of our carve-out to redefine our ESG approach, with the support of our new owners Cinven and Advent International. The post-acquisition assessment was helpful in identifying what we do well and where we needed to make improvements.

As a result, one of the main changes we made was to set up a new global ESG function reporting directly to the CEO, which showed the organisation how important ESG is to us and how economic success needs to come alongside sustainable development.

ESG is a multi-dimensional challenge, so there is engagement from our investors at executive board level and then at management level, where we have regular check-ins and extensive interactions between the TKE and Cinven teams. On my side I bring in the relevant experts, whether that is the chief human resources officer, the head of safety or the head of compliance. For us, it is important that ESG is embedded across our organisation, so we do not have one single team taking responsibility. The approach we have developed with Cinven is both nimble and broad, with different touchpoints.