Case study by Doughty Hanson
- Early consideration of ESG coupled with on-site due diligence visits can enable a GP to more effectively tailor engagement activities and target material issues.
- A GP can collaborate with the portfolio company to incorporate ESG risks and opportunities into a tailored and flexible action plan.
- A GP can establish in-house ESG resource with the experience and qualifications necessary to understand both the operations of the portfolio and needs of the deal team.
Doughty Hanson has been active in European private equity for over 27 years, acquiring majority stakes in market leading businesses with enterprise values at the time of acquisition typically in the range of €250 million to €1 billion. The firm has long recognised the importance of undertaking business in a responsible manner; believing that ESG matters can have a significant impact on private equity investment, both in terms of raising funds, making investments and managing portfolios.
Approach to responsible investment
Doughty Hanson’s approach is to treat ESG as integral to the business, both at a firm level and within the portfolio Doughty Hanson addresses a wide range of ESG issues throughout the investment lifecycle through a culture of active ownership and access to in-house ESG expertise that is supported by a wide network of external specialists. ESG efforts are coordinated by a dedicated Head of Sustainability, qualified by over 22 years’ practical ESG expertise, who is a Partner within the private equity team.
Collaborating with portfolio companies
Doughty Hanson works with the portfolio to identify, manage and act upon ESG risks and opportunities through a targeted action plan. This is achieved by identifying and validating what works well, and identifying gaps for value enhancement and risk management. The action plan is specifically designed to be flexible to capture information on an on-going basis and to take into account change management. If issues arise or are identified that were not in the original action plan, they are simply added to it. The approach is to not simply rely on reporting what a company is already doing but to seek to validate and enhance existing initiatives and instigate new ones where necessary. Additionally, Doughty Hanson seeks to play an active supporting role in the event of an ESG incident or crisis.
Rather than focus on any one aspect, Doughty Hanson seeks to understand how all applicable ESG issues might impact an investment during its lifecycle. ESG initiatives at portfolio companies tend to focus on issues that are most material to the investment and a successful exit. All initiatives come with CEO approval and backing. Examples of the types of initiatives that Doughty Hanson will validate or instigate include:
- Managing risk (identifying and mitigating ESG risk e.g. supply chain assessment, product life-cycle assessment, provision of training, behavioural safety).
- Professionalising a firm from the perspective of ESG management (recruiting senior executives and/or plant level specialists; developing policies, processes and procedures in collaboration with these executives and specialists; formalising management systems and reporting processes).
- Growing the top line (identifying opportunities to develop new products and services and validating existing ones).
- Saving money (reducing cost through environmental efficiency, e.g. energy, water, waste, and/or improved health and safety, e.g. fewer accidents and reduced insurance costs).
Monitoring and disclosure
Doughty Hanson engages with the entire portfolio on ESG with a varying focus according to need, materiality and exit strategy. Each portfolio company has a tailored action plan that incorporates the ESG factors identified during both due diligence and ownership. Progress against this action plan is monitored and reported on in exactly the same manner as for any other aspect of value creation and risk management; namely discussions at weekly team meetings, during periodic steering committee meetings, and within reports from quarterly investment committee meetings attended by all investment professionals and Partners.
There is also a formal annual ESG reporting obligation across the Funds. This captures data relating to health and safety performance (e.g. accident statistics), environmental performance (e.g. water conservation or energy management), community engagement (e.g. charitable activities) and governance (e.g. ABC risk) as well as any bespoke ESG initiatives or issues the company has been involved in. The data received each year helps inform the bespoke value creation work within individual portfolio companies. Doughty Hanson has also undertaken fund-wide ESG assessments on issues of material impact to the fund as a whole.
A typical engagement will ultimately seek to address all the relevant material ESG aspects of a business. For example, at floor coverings manufacturer Balta, Doughty Hanson and portfolio management worked to grow the top line through the development of “green” product ranges. Doughty Hanson provided in-house expertise to challenge and also validate the “green” credentials of the range. Since 2011 the range has generated additional revenues of over €4 million. This work compliments initiatives aimed at addressing energy efficiency and installing on site renewable energy, and which have resulted in cost savings of €1.7 m a year and saving 4,750 tonnes carbon annually. Similarly, providing training and improving the organisational safety culture resulted in improved safety performance and savings of €1.9 m since 2009 arising from a reduced number of incidents.
Doughty Hanson believes that these initiatives better position their businesses for exit. For example, at packaging business Impress, sold in 2010, initiatives contributed to a 50% reduction in accident frequency rate, 500 tonnes of waste recycled a year, 1,800 tonnes of carbon emissions saved a year, and equating to €2 million a year in savings or €12 million (6x Exit Multiple). This represented 3% of the €380m of equity value or 5% of the overall €40m in annual cost savings generated at the time of exit, and the firm had only just started to really engage at that company.