Case study by CVC Capital Partners
- A GP can develop a screening tool for investment deal team members to use during due diligence.
- A GP can survey their portfolio companies to determine the levels of ESG integration and understanding, and what is needed in terms of support.
- A GP’s operations team can use findings from ESG due diligence to develop value creation opportunities.
CVC Capital Partners (CVC) focuses on large buy-outs in Europe, North America and Asia. Over the past five years, CVC has been formalising its approach to responsible investment. CVC recognises the impact that the PE industry can have on the environment and society and as such believes the consideration of ESG issues should be integral to its investment process. It is also widely acknowledged across the firm that ESG best practice by companies overlaps in many areas with sound business management and value creation within a business.
Developing an ESG strategy
Through its ESG strategy, CVC aims to:
- ensure that a consistent approach is taken to ESG due diligence on potential investments;
- monitor and understand the progress that portfolio companies have made with their own ESG programmes and develop a method of reporting this progress to investors;
- encourage portfolio companies to take a proactive approach to ESG matters, including sharing best practice on ESG.
Integrating ESG strategy into operations
In order to meet the goals of its ESG strategy, in the past few years CVC has focused on the following projects:
Sustainability screening tool
CVC has made an ESG review a requirement in the potential investment review process. To identify ESG related issues during the due diligence process, investment deal team members are given access to an online sustainability screening tool developed by an external consultant. The screening tool is divided by industry sector in order to highlight the specific ESG risks and opportunities of a particular sector. The issues covered include environmental, climate change and energy use, labour issues, business ethics and corruption, human rights and water availability. If appropriate, ESG actions are then built into the post-acquisition investment plan, often with the assistance of CVC’s operations team. A portfolio company review, including an ESG review where appropriate, is undertaken six months after initial investment.
Commissioning a survey across the portfolio
The formalisation of CVC’s ESG integration strategy began in July 2009. A sustainability consultant, involved with the firm’s ESG programme, helped commission a comprehensive survey of 49 of the firm’s then 50 portfolio companies. The aim of the survey was to better understand the perceptions and management activity of ESG in the investment portfolio.
The feedback from the survey was extremely positive with about two thirds of the portfolio companies expressing an interest in obtaining further assistance in relation to sustainability and best practice. Results from the survey also indicated a divergence of ESG understanding across the portfolio.
Last year CVC commissioned a new survey, which was more in depth, reflecting the fact that the ESG agenda at most portfolio companies has matured since the last survey. Its primary objective is to assess the general attitudes of the portfolio companies towards ESG in their businesses, and to assess perceptions on risk and opportunities. It also sought to understand what portfolio companies would find helpful from CVC in terms of support.
Following completion of the survey, each company was given a four page summary of their approach to ESG and a high level benchmark of their approach compared with the rest of the portfolio. The aim is to enable CVC to highlight anomalies between risk, management of that risk, attitudes and action.
Value creation with the operations team
The operations team is now an integrated part of CVC’s ESG strategy. Where relevant they use both information accumulated from investment due diligence and the results of their own investigations to determine where they can add value to a portfolio company.
One such example of where ESG meets value creation is a programme at a portfolio company operating in the distribution sector. By virtue of its operations, fuel use is a significant sustainability issue and expense for this company. The operations team, working with the investment team, have put together a programme to target the reduction of 20-30% in fuel consumption. This will be achieved through the introduction of more efficient vehicles, route and load optimisation mechanisms and a programme to encourage more fuel efficient driving.
In order to encourage other portfolio companies to consider similar schemes, the firm is considering ways to share experiences and best practices within the rest of the portfolio.