The importance of ESG – creating value by doing the right thing

Investment Director, Ravi Monteiro discusses how a well-defined ESG strategy can support businesses to create value.

Over recent years sustainable, responsible investment has had an ever-brighter light shone on it as ESG has transitioned into a key agenda item for every board. From plans to achieve net zero through to effective ways of promoting diversity, equity and inclusion, having a developed ESG policy is becoming increasingly important for companies and investors alike.

As businesses look to demonstrate that they can be a force for good, as well as for driving profits, their leaders increasingly need to ensure they are building sustainable organisations for the long-term.  This extends beyond their own companies across their entire supply chain; are they interacting with employees, customers, suppliers, investors, and the broader community in a responsible manner?

But a focus on doing what is right does not have to be mutually exclusive from driving shareholder value; in fact, quite the contrary, with a well-defined ESG strategy providing both downside protection and opportunities for upside value creation in a number of ways:

Attracting and retaining talent

Employees are increasingly looking for more than “just a job” with the opportunity to feel part of something that is purpose-led. Creating a strong ESG focussed culture can help attract and retain talent. This is only going to become more important as the competition for talent intensifies. According to research from sustainability consultants Anthesis “Over half (53%) of the UK’s workforce say sustainability is an important factor in choosing a company to work for”*.

Driving sales

Both B2B and B2C customers are increasingly considering sustainability as a core part of purchasing decisions. According to the SEC Newgate’s ESG Monitor research report ‘‘51% of consumers are strongly interested in ESG issues and 39% are prepared to consider direct action if corporates fail to meet ethical and sustainability standards’’**.   For B2B businesses, a lack of a demonstrable track record of acting in a responsible manner can be a barrier to entry, reason enough to be excluded from a tender process.

Access to finance

Banks are starting to give ESG incentives to companies looking to borrow money, often offering cheaper rates or access to different pools of funding.  A recent example relates to EY who have raised an ESG-linked revolving credit facility (RCF) in the UK with Lloyds, HSBC and Santander. The interest rate applied to the facility will be determined annually, based upon EY’s performance against targets relating to carbon reduction, diversity and social mobility.

Company valuations

Increasingly, a company that can demonstrate it is creating an environmental or social benefit will typically attract higher valuations than those that can’t. Investment partners will often look beyond the pure financial metrics to gain comfort that growth is being delivered in a sustainable way.

GCP’s approach to ESG

At GCP we want to help the businesses we partner with to be great employers, be good corporate citizens and make a positive contribution to society, resulting in better management of risk and ultimately successful, sustainable growth.  In 2021 we enhanced our Sustainable Investment Framework, based around the UN’s Sustainable Development Goals and the UK Government’s Social Value Model. We use it throughout all the stages of the investment lifecycle from deal origination through to portfolio management and ultimately our exit.

At its core, our framework is built around ensuring each portfolio company has the right business disciplines in place to then act as a platform for working with its internal and external stakeholders in the right way.

Throughout the portfolio, our partners are showing examples of how they are developing their ESG initiatives through the framework.

• AIS and Shorterm have both developed their service offerings to support energy transition and drive their future growth plans. In AIS’ case, they have developed products specifically for the offshore wind and electric vehicles markets whilst Shorterm have set up a renewable energy recruitment arm.
• First Mile is an environmental services provider with sustainability at its heart. From its core service proposition of helping customers to improve their approach to recycling, the business continues to develop its circular economy offering and is currently working with a number of brands to support them in their end-of-life strategies.
• Bridewell had a strong drive to reduce its carbon footprint in 2021 and was carbon negative during the year. As of December 2021, the business had planted over 5,000 trees as part of its ‘’Bridewell forest’’ initiative.
• Diversity is a core priority for much of the portfolio. CubeLogic have a focused agenda to improve diversity across the business and appointed their first female member to the board in 2021.  Flint Global have recently set up a DE&I (diversity, equity, and inclusion) committee ensuring they are developing their current employees and recruiting from a broad range of backgrounds.

Ravi Monteiro developed and leads GCP’s Sustainable Investment Framework. You can find out more about him here.

*Findings from Anthesis research can be found here
**Findings from SEC Newgate’s 2021 ESG Monitor research can be found here