ESG: Partnerships for progress

As we complete our bespoke ESG assessments on every LDC portfolio company, Alex Bexon, ESG Director, explains how our proprietary framework is helping businesses to become more responsible.

We’ve now reached a stage where the principles of environmental, social and governance – collectively known as ESG – have become crucial to the licence to operate for businesses of all sizes across Britain. Far from being just risk mitigation, companies recognise ESG offers the opportunity to create value and competitive differentiation.

The ambitious management teams that choose LDC do so in part because we approach things as a partner, providing support and advice during the investment period. And the scope of that role includes helping our portfolio companies with their ESG strategies and the value they help to create.

Our framework

 Over the past year we’ve assessed every primary investment in our portfolio against our proprietary ESG Framework. This allows us to review each company’s approach to ESG, understand its maturity and assess the risks to mitigate and the opportunities for growth and differentiation.

The assessment is rigorous and holistic and, importantly, it’s flexible, covering the aspects of ESG that are most material to each business. It’s also bespoke because we recognise there’s no one-size-fits-all approach for a diverse portfolio of nearly 100 businesses covering all regions and sectors of the UK economy.

So how does it work? We’ve designed the framework to be challenging – that’s key to ensuring progress. So while it’s reassuring to see the companies that are already leading the way in how they embed principles of ESG into their businesses, the important thing is looking at how we can support management teams to continue to improve.

First, we take time to consider which aspects of ESG are truly relevant to the business and where the focus should be. For example, it might be appropriate to have a greater focus on finding ways of reducing the emissions of a manufacturer than a business services firm operating from a shared or rented office, with a smaller carbon footprint. This focus means we can have greater impact.

We then work closely with the management team to review all available information to help inform the assessment. This is a collaborative exercise with senior management to ensure we fully understand the company’s approach to ESG.

Finally, as part of the assessment, we make recommendations to management teams, with our Value Creation and Investment teams available to help companies implement the changes that will help accelerate their ESG progress. This isn’t just a consideration at investment, but an incremental process throughout the investment period.

For each company, we collect data throughout the year to track progress. As a signatory of the ESG Data Convergence Initiative, we also use this information to help improve the comparability and consistency of ESG data collection, benchmarking and reporting among private equity investors.

I’m seeing many examples of how our approach is benefiting companies across our portfolio. With our support, Kingswood and Lomond Group are pivoting their fleets to electric vehicles and using telematics software to help their employees drive more efficiently, saving miles and reducing their carbon footprints. The assessment is helping James & James to progress towards B Corp, a certification that will resonate with stakeholders. And the framework was fundamental to Precision Micro’s first ESG Impact Report, which demonstrates ESG is deeply embedded into its strategy and will be central to future growth.

An ongoing journey

 Having completed the first round of assessments, what have we learned? The first thing is that, as high-performing businesses, companies in our portfolio have already made significant progress on ESG. Our framework adds value by providing structure to their approaches and identifying ways for them to accelerate their progress.

Another observation, and one that reassures me, is on the seniority of the people who take overall responsibility for ESG. A few years ago, ESG might have nominally been assigned to a mid-management employee. No more. Today, accountability sits with senior leaders, often those on the executive board with a standing agenda item on the board meeting agenda. It sends a message very clearly that a company takes ESG seriously and ensures that things happen.

Businesses now face more external scrutiny than ever before – and rightly so. No company is perfect, but stakeholders expect to see a plan in place, with tangible progress and targets. Yet with risk comes opportunity and it’s easy to spot the businesses that have turned their approaches to ESG into competitive advantages.

For companies early in their journey, there is advice available, either from us in our role as a supportive investor, an experienced peer in the LDC portfolio or one of our many expert partners. It’s important to remember that when it comes to ESG, the goal is progress, not perfection.

Earlier this year LDC was named in Real Deals Future 40: ESG Innovators in recognition of our efforts to champion ESG excellence and deliver on our nine commitments to support a more sustainable and equitable future.