Article

ESG and diversity: redefining value for your business

Maria Thomas Maria Thomas

Over 120 business leaders joined us at our recent webinar to discuss how the events of the last year have redefined the way investors value your business. Maria Thomas looks at how our panel felt ESG, diversity, and inclusion are a priority for investors.

The market is recovering. We're currently seeing the FTSE 100 climb 40% above the lowest point it reached during the COVID-19 situation, while the FTSE 250 has actually risen above its pre-coronavirus levels. Yet, the market has been permanently altered by the events of the last year.

Changes in customer behaviour and the way we do business, along with new environmental, social and governance (ESG) issues, have altered how investors perceive your organisation. It's a priority right now to discover what's driving these increased valuations in this changed world. We've been working to understand how value has been redefined over the last 12 months.

Consensus on the redefinition of value

We polled key private equity (PE) investors in the mid-market to find out how recent events have impacted their value assessments. All respondents agreed that the last 12 months have changed how they look at valuations.

Overwhelmingly, investors are thinking about risk and sustainability. Previously successful firms like the Arcadia Group fell during 2020, while modest investments have prospered. The true winners are the organisations that adapted quickly when the world changed.

As such, investors are now looking for firms that are sustainable and adaptable to whatever circumstances they find themselves in. So, the priority for our clients right now is managing today and planning for improved sustainability and agility tomorrow.

We've identified four key priorities for our clients to act as a framework to help with planning ahead to drive sustainable earnings.

IN THIS ARTICLE

Skills

Ragi Singh, Partner, Gowling WLG - "It's not about the money any more. People want to work for an organisation with a social purpose.."

Location is no longer a barrier for the workplace. Many businesses have proven they can operate successfully in a remote world. That means you can source your employees, strategic partnerships, and customers anywhere. But do your people have the skills they need to work remotely.

Upskilling your existing talent and adapting to a remote culture has taken a great deal of effort over the last year. And that new way of working isn't going away.

We've seen some firms push back against remote culture, as they believe they work better in the office. However, the ability to switch to remote working will make firms more resilient in case of future crises, which will drive investment. At the very least, this will be the case while the last year is fresh in the minds of investors.

The return to the office

This is all without mentioning the direct correlation between hybrid working, profit and employee engagement. Surveys show that around 80% of employees don't want to go back to the office full time, so not investing in hybrid working will contribute to costly employee churn. This means remote skills will continue to be needed.

However, once your existing people have been upskilled to the new way of working, your job there is done. Any remaining skill gaps can be filled with remote workers from anywhere in the world. Thereafter, your investment in this area can go back to normal.

The ongoing issue, however, will be ensuring your business has an inclusive and sustainable culture. Your new workplace will need to see remote and office-based workers collaborating seamlessly, with both styles of working accommodated.

Data

Angela Peacock, Global Director of Diversity and Inclusion, PDT Global - "Two years down the line, nobody will be contracting with anybody that can't give decent race and gender numbers"

The key to sustained profitability in a changing world is making the right decisions on a deadline. To do that, you need to have accurate, timely, comprehensive information at your fingertips at all times.

Firms that report on all their relevant management information (MI) and can showcase this data to leaders when needed will be more agile and sustainable in a volatile market. And that will appeal to investors. Best of all, that historical data can be rolled out at any time to prove profitability and progress to potential investors.

End Clothing, for example, is an online luxury-clothing retailer from the north east of England. The firm has £150 million in annual turnover and £30 million EBITDA. Still, it was recently able to gain investment from the Carlyle Group, based on its data-driven model and lockdown-proof sales channels.

ESG reporting drives value

We're currently in the middle of a boom in ESG data reporting. Coca-Cola have been known to offer up to 30% lower rates to firms that don't meet diversity targets, while BT offers automatic renewals to the most diverse law firms on their panel.

Perhaps most pressingly of all, the EU's new Sustainable Finance Disclosure Regulation (SFDR) will soon compel financial market participants to justify their decisions with regards to sustainable investments.

We may not be part of Europe anymore, but we will still want to do business with European firms. Companies lacking proper ESG reporting may be excluded from doing so.

With these barriers to entry into these markets and partnerships, making sure you have solid reporting on inclusion, diversity and ESG is essential to unlock the growth you're looking for.

Technology

Usman Malik - "Technology is a key differentiator, it's a barrier to entry and it's a basis for scalability"

Digital transformation is no longer an optional or long-term goal. Most companies impressed themselves by transitioning to become a remote workplace almost overnight last year, but that's just the tip of the iceberg for technology.

Outfitting your organisation with the latest tech is a key differentiator between you and your competitors. Not to mention, relying on legacy technology can be a barrier to entry into certain markets or partnerships.

This isn't just the case in the office either. We recently advised Themis Risk Holdings who have moved from a traditional 'man in a portacabin' approach in favour of advanced CCTV systems with digital monitoring. This change drove the firm into double-digit EBITDA.

The rise of the machines

Your technology needs to be cutting edge to compete and then your people need to be upskilled to use the new technology. This immediately draws a link between technology and your people culture and wider ESG issues.

As a practical example, video conferencing and collaborative tools allow working from home. This means no more commuting, which is much better for the environment. According to Global Workplace Analytics, having all employees work from home 50% of the time will cut 51 million tons of greenhouse gas emissions per year.

Increasing your profits while improving the public perception of your firm and protecting you from anti-carbon regulations are all tremendous benefits from maintaining a change most of us made by necessity already.

ESG

Tom Redpath, Investment Director, Bridges Fund Management - "I've not found a business where focusing on making it a more enjoyable place to work hasn't created more value"

By now, you may have noticed the ESG trend that we've identified to be running throughout all the key points in our framework. Indeed, ESG is the one common factor we're seeing among most areas of growth in the market.

While upskilling your people and completing your digital transformation is a one-time investment, ESG is expected to stay a priority for investors for at least the next three years. Still, it's currently low on most board agendas.

Our survey showed that most PE firms don't have a head of ESG and a third don't have a formal ESG policy, let alone the kind of extensive reporting that employees and regulators are demanding.

The hidden benefits of ESG

Currently, diversity is primarily about optics. If your customers and clients see people like them in your team, they're more likely to want to work with or buy from you. But firms are seeing real benefits of inclusion, diversity and ESG in action. Studies have shown that, if you have a higher number of senior roles in your firm filled by women, you get a better fiscal result.

This is because a diverse team brings a diversity of experience and opinion, which dramatically improves risk assessment. However, without inclusion, the diverse perspectives won't be listened to and you won't get that benefit.

As a result, investors increasingly don't want to work with firms that have 50% staff turnover or an all-male board. But, if you're in that position, how do you transition to be more diverse?

Making a change

Schedule some time every week to think about diversity, inclusion and ESG. It's not a case of one training session and done. You need a consistent, regular, dedicated time to start making progress.

Talk to your team and really listen to what you can do to improve inclusion - make them feel heard. You'll be surprised by what you can learn from them and how they can help you.

Work to train out unconscious bias from your team and ensure steps are taken to improve inclusivity. Putting your preferred pronouns on your email signature takes seconds, but can make a huge difference to your team feeling comfortable in the workplace.

Once your organisation is inclusive, you will naturally attract a diverse team, and listening to your employees and customers will bring to light ESG issues that you can make a real impact on.

Once this happens, don't keep silent. Make sure you're reporting on this data and letting everyone know that things are getting better.

Moving forward with ESG

In the future, investors will look at far more than just profitability when valuing businesses. The diversity of your people, the inclusivity of your culture, and your contribution to ESG issues in the wider world will be just as important in drawing finance to your firm in order to drive growth.

For support in redefining how you show the value of your business, get in touch with Maria Thomas.

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