Keynote Interview: Cinven's ESG legacy

Cinven was an early signatory to the PRI, joining in 2009. Why was this important to the firm?
Barker:
Cinven has always taken a responsible view towards investing, but we recognised that we needed to be doing more, both to ensure we were adhering to best practice and to provide assurances to our investors and the wider world about how we do business. When the UNPRI first emerged, there was a lot of negative sentiment towards the banking industry – and private equity was grouped in with that. We felt it was important to stand up and be part of a movement that was seeking to ensure responsible investment practices prevailed.

Investors in our funds – many of whom are public pension funds that have a strong interest in making good returns in a responsible way – are increasingly looking for evidence of commitment to ethical practices both at a fund and portfolio level.

What tend to be the most common barriers to effective ESG management and reporting before you invest in a company?
Barker:
In new portfolio companies, we often have to go from a standing start – there is usually no centralised management of ESG. This is because, while ESG is rising up the agenda in most companies, in some of the smaller, private businesses that private equity tends to target, people just haven’t had the time or expertise to think about how they can manage these issues. And in divisions that are being bought out of larger parents, the teams usually haven’t had the responsibility for their own thinking on ESG matters. Most of the time, management are willing to engage but they just don’t know where to start.

Maydon: I agree. Time constraints are the most common reason most businesses we back don’t have formalised ESG management and reporting in place before investment – most don’t have anyone dedicated to ESG matters. Yet very often businesses are already capturing some of the key information required to manage ESG effectively, such as that on health and safety and legal compliance; it’s just that they can’t yet draw together the data from different departments. That is often the key challenge: getting the information centralised and then ensuring there is high-level responsibility for managing according to that information.

Barker: Sometimes there is also a misunderstanding about what ESG actually is and a big challenge then can be getting management to see how important an issue this is – it’s not just a woolly fad, and it’s about far more than company fun runs. Sound ESG practice is at the heart of good business, risk and reputation management.

How do you go about establishing an ESG framework in portfolio companies?
Maydon:
We have developed a process over the last few years for this. Our starting point, once we have invested, is to send out an ESG questionnaire to establish which ESG data the company already captures. This is important as we don’t want our portfolio companies to view ESG as just an onerous reporting requirement put in place by their private equity owners. From this, we prepare a set of guidelines for our portfolio companies that helps them structure a framework that works for them. Importantly, we also make it a requirement of our investment that ESG is a board agenda item. We recognise that sound ESG management can only get up and running if it is being driven at a senior level within the organisation and sometimes we have to demonstrate to management how this is critical to their business, in terms of risk, but also opportunity.

In addition, we run an annual conference to which we invite portfolio companies. There, companies can share best practice, some are invited to present case studies and we also invite expert speakers along.

However, we also realise that our portfolio companies sometimes need expert support, so we have teamed up with the sustainability team at KPMG, who can help review policies and KPIs and, if needed, work more closely with them to develop the right approach, bespoke to their business.

So how can companies develop a framework that is meaningful and works for them?
Barker:
One challenge is defining ESG KPIs – what should individual companies be looking at? And while managing these issues shouldn’t require additional in-house resources, sometimes companies benefit from external specialists as they can advise on what other businesses in the same sector are doing and benchmark performance in some of the key areas.

In many ways the right framework depends on the business, so the KPIs for a manufacturing business will necessarily be very different from those of a software company. When we started devising our process we were very keen not to take a cookie-cutter approach as this can lead to a box-ticking mentality.

Maydon: The company has to have ownership of the initiative if the ESG framework is to be meaningful, so we ask portfolio companies to decide which KPIs are most critical to their business, as even within the same sector there can be different drivers from business to business.

There are three main KPIs that all of our portfolio companies report on – CO2 emissions, frequency of accidents at work and anti-bribery and corruption measures – but beyond that, it is very much tailored to individual companies. So if we take fibre telecoms operator, Ufinet, as an example, the company installs networks alongside electricity cables and gas line ducts in geographic regions such as Latin America. Health and safety is one of the most important areas to measure, so the company reports on the percentage of staff that receive training. For CeramTec, a German high-performance ceramics manufacturer, energy reduction, which directly relates to CO2 reduction, is an important measure in CeramTec’s energy intensive production; and in financial services, the governance part of ESG is the most relevant to these businesses.

Many of the businesses you back operate across many different geographies. How can they ensure ESG is measured and managed on an international scale?
Barker:
For any of the businesses we invest in, sound governance is the key item in ESG, although particularly so for international companies. It’s relatively easy to maintain good ESG procedures if you’re just ope-rating in the UK. Yet if you are negotiating contracts in some developing markets, where corruption can be an issue, or if you have to manage waste disposal in a country that doesn’t have developed networks for this, you have to ensure that the company’s governance is strong enough to ensure ethical standards at all times. It’s absolutely essential that ESG objectives permeate the whole organisation.

Maydon: One example is speciality pharmaceutical company AMCo. One of the challenges it had faced, but has overcome, was getting partners to sign up to appropriate guidelines. It could see there was an advantage in building a reputation for being an ethical provider of medicines. When we invested and brought two companies together to create the business, it undertook a complete review of how it approached ESG issues. It became the first pharmaceutical company to gain the BS10500 anti-bribery management standard, for example.

And how much emphasis do buyers put on ESG issues in today’s market in your experience?
Barker:
I’d put ESG into three main buckets: first, issues that improve economic performance, such as reducing energy use and wastage; second, matters that have serious consequences for the business – risks that may or may not arise that could have a material impact; and third, those that are nice to have.

Buyers would generally expect that most businesses are good at the first category. On the second, as sellers, we have to ensure that the company has addressed these issues as they can have an impact on exit. In some cases, this can be an opportunity – so, if a company has a poor record on pollution, we can invest to clean it up, thereby reducing the discount on exit. The third category is where we’ve seen less focus as these tend not to have an economic impact on the business in question.

Maydon: Nevertheless, the third category can feed into reputation. If we look at AMCo again, the company has done a lot of work in the community, which helps keep staff motivated. You can’t put a value on that, but if the reverse were true and staff weren’t motivated, there would be an impact on how the business performed.