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Are you ESG Ready?
Success of any deal is measured when the investment delivers a sustainable positive financial outcome which itself is a result of a business leader successfully safeguarding his business from numerous risks and capitalising on new opportunities. Climate change, scarcity of resources and environmental degradation are some real issues challenging the world leaders today; one inescapable reality is to bring a meaningful change by decarbonising the global economy, strengthening the environment and societies and building a sustainable business with measurable value.
Responsible Investments (RI) is increasingly becoming an important focus in the investment industry i.e. the philosophy of making investments based on a set of principles and not merely profits. In an interesting study, PwC’s Global Responsible Investment Survey 2021 demonstrates the paradigm shift of putting ESG at the heart of their business strategy by investment funds. The survey reflects:
The investor communities are putting ESG at the core of their strategy throughout the transaction life cycle and are acting as a game changer in building a successful portfolio of investments.
Investment strategies are built around pushing portfolio companies to decarbonise the business, making supply chains more resilient to disruption of climate change and developing inclusive workforces for long term value creation.
PwC’s ESG Deals team supports investors and lenders in adapting and adopting to ESG and building long-term value.
Responsible Investment Policy for Private Equity, Venture Capital Funds, Asset Managers, Family Office
Responsible Investments is increasingly becoming an important focus within the investment industry. The United Nations Principles of Responsible Investment defines responsible investment as a strategy and practice to incorporate corporate environment, social and governance (ESG) factors in investment decisions and active ownership. In other words, the investor needs to take into account and consider the consequences and impact of their investments on the planet and people.
This can be achieved through a composite approach of (a) considering ESG issues at the time of investing; and (b) improving portfolio companies ESG performance and score over a period of time. Primarily, this also means that along with financial parameters, the non-financial metrics are also critical to the investing process while making investment decisions.
We have witnessed a fundamental shift in focus within the investor community when it comes to ESG integration within the fund houses. There has been a paradigm shift in narrative from risk management, cost efficiencies and value preservation to identifying new opportunities and value creation through transformation journey.
At PwC, we provide a full range of Responsible Investment services to our private equity clients, fund houses, mutual funds, asset managers, family offices, etc. with end-to-end support in terms of defining your aspirations with respect to market positioning from compliance to leadership and from values to impact.
How can PwC support PEs/Investors/Fund Houses/Family Offices in their Responsible Investment journey?
Design Responsible Investment Policy and Strategy
Design a fund-raising platform for investment opportunities in carbon credit markets
Design an integrated ESG dashboard to track ESG performance of investee companies including providing scoreboard with agreed methodology
Advisory support for registrations of global institutions like UN PRI, GRESB, UNGC, etc. and commitments thereof
ESG standards and key performance indicators (KPIs)
KPI tracking, monitoring and re-assessment of portfolio companies’ ESG performance (through our propriety and customized digital cloud-based tool) and developing an improvement program for strengthening ESG performance during follow-on funding rounds
ESG Report, Sustainability Report, Transparency Report
Environment and Social Impact studies
Communication support
Trainings and support in capacity building
ESG Governance framework
Embedding ESG in the Deals Lifecycle: From Compliance to Value Driver
The growing influence of ESG in the business strategy has pushed the envelope for investors from merely looking at it from a compliance lens to a value driver in the transaction lifecycle.
- Pre-investment
- Investment ownership
- Exit
Pre-investment
- ESG screening tools
- ESG due diligence
- Compliance of RI Policy/Framework
Investment ownership
- Portfolio reviews on ESG
- Detailed ESG issue support
- Corrective Action Plan (ESAP)
Exit
- Review of ESG readiness on exit
- Vendor ESG due diligence
- Pre-IPO ESG Strategy
The due-diligence and review process is conducted using relevant frameworks and standards. We support the investment funds to conduct diligence reviews using SASB (Sustainability Accounting Standards Board) and GRI (Global Reporting Initiative) standards and frameworks set up by institutions such as International Finance Corporation (IFC), Asian Development Bank (ADB) etc. The objective of ESG diligence process is to:
- Review Target’s business policies, procedures, performance and benchmark that with ESG best practices amongst select peers and frameworks
- Conduct site visits (to identify non-compliances with respect to environment, health and safety issues)
- Assess potential material risk and quantify financial impact to the extent possible
- Provide red-flag and detailed report on findings including corrective measures possible
- Provide 100-day actionable plan post transaction
Value Creation in Portfolio Companies
PE players, VC funds, asset managers have long-term vested interests in their investee companies and the stakes are higher in buy-out situations. Integrating ESG practices has potential to deliver good risk adjusted returns as they benefit from potential lower cost of capital and improved operational performance in a longer term.
Depending on the maturity level of each portfolio company, we help investors to not only monitor the ESG performance of their investments on an ongoing basis but also enable them to identify potential risks and leverage on opportunities.
Based on the outcomes of the monitoring exercise, PwC supports in achieving the following for their portfolio companies:
Design, develop and integrate purpose-led sustainability vision (aligned to the ESG vision of the PE firm) into their long-term strategic plan
Assess exposure to climate-related risks in portfolio companies based on climate risk assessment tool (aligned with TCFD) with a robust methodology to assess physical and transition risk including scenario analysis
Assess GHG emissions and strategise decarbonisation plan
Assess health and safety concerns with overall objective of reducing attrition and enhancing productivity
Robust governance structure to enhance brand and reputation
Conceptualise CSR plans
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