Case study by Egeria
- A GP can ask its portfolio companies to draw up their own ESG policies and goals.
- A GP can analyse the materiality of ESG issues across the portfolio to identify areas of greatest impact where they should focus their efforts.
- A GP can ask their portfolio companies to develop progress reports on their priorities, plans and status on an annual basis.
Egeria was founded in 1997 and is a fully independent Dutch private equity firm, targeting controlling stakes in mid-market companies (with a value between €50 and €250 million) in The Netherlands or in companies that have a clear Dutch link.
Egeria recognises the impact that private equity investments may have on the environment and society – and vice versa. Egeria also believes that ESG factors can have a material impact on the financial performance and value of its portfolio companies and therefore feel they are responsible for mitigating any ESG risks as well as seizing ESG opportunities. In the autumn of 2010, Egeria’s partners decided to make their ESG values and corresponding conduct more explicit. The partnership felt it was of key importance to align the management of ESG factors with their core business of creating long term value for their LPs, and also to be able to demonstrate this. They also decided to go after some “quick wins” first, i.e. initiatives that would yield concrete and measurable results relatively fast, that would get the more sceptical team members on board.
Egeria has developed an ESG framework that is consistently applied across the portfolio, integrating ESG into fund management, due diligence and reporting. The methodology allows Egeria to identify opportunities in areas of greatest impact, and to marry risk mitigation to tangible value creation.
Egeria asks its portfolio companies to develop policies and goals for the ESG issues that are most important to them and most relevant to their operations. Egeria is able to analyse the materiality of these issues and get a comparative perspective on the ESG issues within a single company, across the full portfolio or within an impact category. This has the potential to expose unexpected opportunities and risks that might have been missed if not for the ESG lens.
As Egeria focuses on the different aspects of sustainability to help create value, this topic is increasingly addressed in the meetings with local management. Ultimate responsibility for acting upon ESG risks and opportunities lies with the company management.
During the second half of 2011, all portfolio companies prepared reports on their priorities, status and plans for the first time, with the assistance of external expertise. As follow up, progress reports are now prepared on an annual basis. Consistent portfolio wide reporting creates discipline and drives progress on the most pressing issues in the portfolio. Additionally, reporting ‘creates its own reality’ – once all members of the investment team and all company management teams realise that ESG performance is an essential output, then they will act accordingly.
Egeria’s approach is to focus their efforts only on those opportunities and risks that are material and aligned with the strategy of the company. The portfolio is separated into quartiles, from ‘most relevant’ to ‘less relevant’. Companies that are labelled ‘most relevant’ have higher risks and/or opportunities than others, and are expected to manage them accordingly.
After the third year of active monitoring, managing and reporting, Egeria has created many examples of how ESG management and value creation coincide. Health and safety records have improved across the board, energy and water consumption are more actively and successfully managed, and many companies have embarked upon innovation programmes to create new products and services that both improve ESG performance and are in line with market appetite.
For some companies, ESG is a decisive part of their positioning. The market recognises (and pays for) the fact that their products are more sustainable and recyclable - this positioning also has a positive spin-off on the employee and local government perceptions In such cases, investing in a ‘sustainable turnaround’ pays off in many respects. An example of this is the tile manufacturing company Royal Mosa. During Egeria’s ownership, the company obtained a silver Cradle to Cradle certification for virtually its entire production line. Cradle to Cradle design is an innovative approach to sustainability that seeks to create systems that are not only efficient but also essentially waste free. In addition, a selection of Mosa’s tiles positively contribute to the possible LEED status of a building. In short, sustainability has become an intrinsic part of the value creation proposition of the company.
For some portfolio companies, ESG issues are less relevant as the company’s environmental and social impact is limited. Nevertheless, these portfolio companies will also be encouraged to investigate their potential to create sustainable value.