From compliance to value creation Environmental, Social, and Governance (ESG) will you be ready?
By: Robert Dormanesh and Andrew Kelley
ESG stands for Environmental, Social, and Governance. Private equity and venture capital investors are increasingly applying these non-financial factors as part of their analysis process. Why, to identify material risks and growth opportunities. We see three key areas of influence.
Investors –
Investors are increasingly evaluating the impact that their investments will have based on ESG. They are breaking away from the traditional focus of solely considering returns, and adding a layer associated with ESG opportunities and the associated value creation. The shift is exemplified by the growing number of investors who are using ESG performance indicators when determining where to place their commitments. The resulting sustainable investment strategy has deviated from exclusionary (i.e. avoiding investments not prioritizing ESG) to inclusionary (i.e. seeking investments that do).
Other stakeholders –
Investors are persuading the industry to look beyond their shareholders and analyze other stakeholders. This has resulted in investors and their portfolio companies examining their relationships with employees, suppliers, and communities that they operate in. An uptick in ESG questionnaires from investors has led to developing in-house ESG reporting methods. Portfolio companies are being impacted from a human capital perspective by current and future employees who are looking to align themselves with companies that incorporate ESG. Lastly, suppliers are being examined to ensure enhanced ESG efforts, creating a cascading effect across the supply chain.
Regulators –
Regulators across the globe are increasingly considering sustainability disclosure standards. A potential precursor to what the global economy may experience, the European Union has codified and mandated that its financial advisers and managers publicly disclose the impact that their investment may have on ESG factors.
This is impacting investors from multiple angels. Sources of capital, workforce talent, and regulators, and portfolio companies, are seeking to continue to add value through traditional means while incorporating a new element of sustainability. By focusing on the major issues in each industry and fostering a unified approach among portfolio companies, investors can demonstrate good citizenship and create value.
Craig Arends is a principal at CLA and is the managing principal of CLA's private equity practice. Craig brings a concentration of experience in providing accounting and transaction structuring advice for leveraged recapitalizations, purchase accounting and SEC reporting, assessing quality of earnings, and GAAP accounting. He has far-reaching experience with critiquing financial models and reviewing target companies' financial performance to identify cost reductions and/or operating efficiencies Craig has more than 30 years of experience in public accounting serving public companies, private equity groups, and companies, including a term as principal in charge of a Big Four Capital Markets Group in Moscow, Russia. He has led financial accounting due diligence projects for private equity investor groups and venture capital funds, primarily in the technology, communications, and manufacturing industries, as well as assisting with Foreign Corrupt Practice Act matters ranging from investigation of payments made, validation of compliance with corporate policies, and review of proposed transactions to ensure compliance. When not working, Craig enjoys watching any sports, but his most favorite are baseball, football and soccer.
Comments are closed.