Taking responsibility

Private equity firms are set for a rude awakening if they ignore climate change, says Sophie Flak, the head of corporate social responsibility at Eurazeo.

As director of both corporate social responsibility and digital transformation at Paris-based private equity firm Eurazeo, Sophie Flak sits at the heart of what she describes as “the two major sources of disruption” in the global economy, hence for the private equity industry. Here she explains why the French firm is placing increased emphasis on CSR.

Sophie Flak

Why do you think corporate social responsibility is gaining in prominence?

Several drivers are at play, contributing to the growing importance of CSR. The first one is regulation, which is increasing worldwide, for both environmental and social matters. In the UK there are laws such as the 2010 Bribery Act and more recently the 2015 Modern Slavery Act. France brought in such regulations as the Sapin II anti-corruption law in 2016 and the European Union has beefed up its extra-financial reporting rules. The enforcement of this type of regulation can have big consequences. The extraterritoriality of the US Foreign Corrupt Practices Act has, for example, already cost European companies billions of dollars. The fines are forcing all those involved to take a much more cautionary stance.

On climate, we believe that tougher regulation could quickly lead to the implementation of carbon tax with significant impact on profitability. We have anticipated this as a potential risk and conduct business and operational models stress test in our due diligences related to carbon and energy.

To what extent is this a global trend?

Very much so. This summer, China closed a massive number of companies in the chemical industry because they were not respecting regulations governing air, water and soil pollution. If you’d have put money into these companies, it would have been lost. This is a strong signal that the world is shifting. You simply can’t invest any more without taking these key areas into account. At Eurazeo we conduct detailed due diligence to ensure that CSR regulations are adhered to and that management systems and KPIs are in place.

What about other factors?

Besides regulation and tax, the CSR agenda is also being driven by consumers. The various scandals over child labour, health issues and animal mistreatment have led to greater scrutiny from consumers. Purchasing patterns are changing. One of our companies had a popular palm oil product in the beauty sector. The product was a portfolio success yet when NGOs started to advocate against palm oil, sales started to decrease. Thankfully, we had identified this issue long ago and the company had launched an alternate product. Companies rightly cherish their brand reputation and know that CSR must be considered very seriously.

Resource availability and cost is another factor. Raw material shortages in some areas are becoming an everyday problem. Prices of some resources skyrocket so companies need to adapt and find alternative solutions. We see a growing number of companies shifting their business models from sell to lease or embracing a circular economy model, not only for the benefit of the business but also to preserve their increasingly scarce resources.

Finally, CSR represents the opportunity to improve a company’s financial performance. Saving energy and water, reducing waste and optimising transport can generate very significant savings.

Why should private equity take note?

If firms want to exist and perform in the next 10-20 years, they better take CSR very seriously because the world is changing much more rapidly than ever before.

It’s going to be more brutal than a case of simply being left behind.

Also concern is growing among the large institutional investors to make sure the money that they invest is not going to climate change or poor social or supply chain practices. In order to divest, you also need to find somebody who wants to buy your company. And the buyer needs to be able to feel they can sell it.

Can you give an example of private equity having to adapt to the changing world?

A growing number of major financial institutions want to guarantee how and where their money will be invested. Financial returns are no longer enough. There is a need for ethical value and a greater respect for human beings and the environment. This evolution is sensible. Any private equity firm which does not take this into consideration might find it hard to raise a fund.

How has Eurazeo implemented CSR?

It all started in 2008 when we did our first carbon footprint evaluation of the portfolio, developed a team and trained all employees about CSR. It may sound late when you compare it to other economic sectors but it is pretty advanced when you look at the rest of the finance world. We now have our own CSR board committee and so does one of our portfolio companies. With all other portfolio companies, CSR is discussed at board level at least once a year. Eurazeo’s top management also has part of its bonus based on CSR results.

We have some programmes that we run with our portfolio companies, one of which is called “avoided impacts”. We’re a shareholder in Elis, a French laundry services group. We’ve put in place some very serious programmes to reduce water and energy consumption. You take the amount of water or electricity used to wash one pound of linen, and if you reduce those figures you can calculate direct savings. We have also worked to reduce staff turnover because social variables have a strong impact on profitability as a whole. So far we have avoided more than €25 million of spending there.

This approach is also relevant in small and midsize business. At our French restaurant chain, Léon de Bruxelles, we’ve saved more than €1 million since 2011 a year on efforts to prevent absenteeism, which is always quite hight in this sector. As soon as we can attribute some financial value to a CSR key performance indicator, you change the way it is considered, hence handled by companies. We’re going to strengthen the way it is handled in order to optimise the company. To date, we’ve saved over €200 million in total costs across our portfolio. If teams (both internally and at portfolio level) embraced CSR faster, the savings would be up to at least €400 million today.

What are the difficulties associated with improving CSR?

You have various types of portfolio companies, so you need to keep your A-game across all sectors, from chemical to consumer goods right through to education. We also need to take into account local differences since all our companies are located in many countries. For instance, regulations as well as operational practices can vary considerably in India and France. We need to adapt, while driving progress everywhere. What is complex about a private equity portfolio is that companies come in and out the portfolio.

It takes time to decide the focus and the managerial and operational approach. Deploying a CSR strategy also requires patience. It can be frustrating not to have the necessary timeframe to go as far as we would like on CSR topics. Yet we know there is an undeniable difference before and after Eurazeo comes on board as a shareholder. CEOs of portfolio companies recognise this and the value that it creates.

How co-operative are the portfolio companies?

We see a major change. As recently as four years ago, I would spend nearly half of my time advocating the subject. Now, management teams are far more aware of CSR topics.

They understand that CSR carries significant risks as well as opportunities. They recognise that addressing CSR issues is essential if they want to protect their company’s licence to operate.

On CSR, Eurazeo brings a unique advantage. The team has a large skill set on CSR. We bring knowledge, expertise and operational effectiveness which allows speed, significant savings and results.

Also, we are very pragmatic. We are determined to reach the objectives, yet are flexible on the roadmap and means in order to make the most of all situations, from large cap to medium-sized and small businesses. This approach contributes to building trust and solid co-operation with management and operational teams.

What’s next for Eurazeo?

For several months, we have been working on the integration of the Sustainable Development Goals into our CSR framework. These SDGs have been drawn up by the United Nations in order to solve the world’s biggest challenges.

As a private equity company, we can play a key role in ending poverty, preserving the planet and ensuring prosperity for all. Mobilising our 38 portfolio companies, we can generate significant and rapid change on a global scale by tackling these crucial issues.

Putting CSR into practice

Eurazeo has a challenging set of objectives that aim to reduce risk and create value while having a positive impact on society through both reduced environmental impact and social progress. These are the four aims and their objectives for 2020

Invest responsibility

By 2020:

all due diligence in the advanced study phase of acquisition to incorporate a CSR section

all portfolio companies to perform CSR reporting

all divestments to be subject to CSR disclosure

Establish exemplary governance

By 2020, all portfolio companies to have:

at least 40% women directors on their Supervisory Board or Board of Directors

at least 30% independent directors

an Audit Committee and a Compensation Committee

Create sustainable value

By 2020, all portfolio companies must have:

deployed Eurazeo’s ‘CSR musts’

quantified CSR progress targets

signed up to at least one CSR acceleration programme

Be a vector of change in society

By 2020, all portfolio companies to:

improve the protection and well-being of employees

associate their employees with value creation or company results

reduce their environmental impact



This article was sponsored by Eurazeo. It appeared in the Responsible Investment supplement published with the February issue of Private Equity International.