Environment, Social & Governance Evaluation in … to affect a Company’s valuation and ... •...
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Environment, Social & Governance Evaluation in Acquisition Diligence October 29, 2015
Transcript of Environment, Social & Governance Evaluation in … to affect a Company’s valuation and ... •...
Environment, Social & Governance Evaluation in
Acquisition Diligence October 29, 2015
Today’s Presenters
Adam Johnston Ramboll Environ
Principal, Due Diligence Practice Area Leader
(Americas) [email protected]
Kimberly Miller GE Capital
Vice President, Environmental Affairs
Lisa Grice Ramboll Environ
Principal, Sustainability Practice Leader
Eleni Kouimelis Winston & Strawn
Chair, Environmental Practice [email protected]
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WHAT IS ENVIRONMENTAL, SOCIAL AND GOVERNANCE EVALUATION?
• Often referred to as “ESG” or “sustainability” services
• Helps evaluate management of sustainability risks and opportunities in operations, supply chain and products
• Relates to a wide range of topics with the potential to affect a Company’s valuation and public perception
• Used to encompass criteria used in socially responsible investing
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ESG COVERS A WIDE RANGE OF TOPICS
Environmental
• Environmental contamination
• Environmental regulatory compliance
• Resources use (e.g., energy, water, forests)
• GHG emissions (non-regulatory)
• Waste minimization • Product risk
evaluation (human health & eco)
• Hazard reduction (green chemistry)
• Product lifecycle management
• Employee health and safety
• Employee welfare • Community
impacts • Fair labor
(regulatory & ethical)
• Cultural heritage • Conflict minerals
• Code of conduct • Transparency and
disclosure • Accountability • Dispute resolution
(employee & community)
• Implementation • Supply chain
Social Governance
Ramboll Environ’s current due diligence scope covers a subset of ESG topics
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ESG IN THE NEWS
“Tesla to Use North American Material Amid Pollution Worry” Bloomberg, March 31, 2014
“Target to increase minimum wage to $9 an hour, matching rivals WalMart and TJ Maxx” Reuters, March 19, 2015
“Mining company BHP Billiton to pay $25 million to settle SEC anti-bribery charges” Associated Press, May 20, 2015
“Danone Raises Mengniu Stake Amid China Food Safety Concerns” Bloomberg, February 12, 2014
“Indian officials order Coca-Cola plant to close for using too much water” The Guardian, June 18, 2014
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ESG IN VALUE CREATION
Risk management
Business opportunities and competitive advantage
Government regulation
Corporate reputation and brand
Customer and investor demand
External pressures (e.g., NGOs)
Employee interests
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UN SUSTAINABLE STOCK EXCHANGES (SSE) INITIATIVE
• New stock exchange guidance – Model Guidance on Reporting ESG Information to Investors – created by the SSE Initiative and London Stock Exchange in September 2015
• “Creating more attractive markets where investors can better evaluate fundamental drivers of value creation…”
• Campaign to have all exchanges provide written ESG guidance by the end of 2016; 15% of those without guidance already committed
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GROWING INTEREST IN ESG BY PRIVATE EQUITY FIRMS • Almost 90% of PE firms surveyed
in 2013 and 2014 said that they planned to increase their attention on ESG issues in the future, up from around 55% in 2012
Source: PitchBook 2015 survey
• 68% of those planning divestitures, mergers, or IPOs in the next year said they will evaluate ESG considerations
Source: PricewaterhouseCoopers 2013 survey
• There are more than 150 private equity signatories to the Principles for Responsible Investment (PRI)
Source: PricewaterhouseCoopers/UNPRI 2012 survey
Environmental, Social, and Governance Due Diligence • Deal context
• Fast paced and competitive process
• Identify and quantify material ESG liabilities • Negotiate and document risk allocation • Lenders requiring ESG reviews
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Sustainability Reports
• “A sustainability report is an organizational report that gives information about economic, environmental, social and governance performance.” (Global Reporting Initiative (GRI) definition)
• The most widely adopted framework is the GRI Sustainability Reporting Framework
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Sustainability Reporting Value Add
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Issues With Sustainability Reporting
• Weak or unreasonable goals • Lack of or mismanaged data • Discounting feedback • Failure to follow guidelines • Under or over reporting • Thinking short-term • Inadvertent greenwashing
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RAMBOLL ENVIRON’S SCREENING-LEVEL APPROACH TO ESG DUE DILIGENCE
Focus review on corporate-level awareness and written policies and plans 1 Target broadly applicable ESG topics (e.g., energy use, product stewardship), as well as sector-specific issues, as appropriate 2 Recognize importance of typical due diligence timeframes and budgets 3 Maintain flexibility to modify approach depending on the needs of the client and type of target 4
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WHAT WE COVER: SECTOR-NEUTRAL ESG TOPICS
Environmental
• Environmental Management System (EMS)
• Energy and Greenhouse Gas (GHG) Management
• Water Use and Impact
• Biodiversity and Ecosystems
• Climate Risk and Resilience
• Waste and Materials Use
• Product Stewardship – Environmental Topics
• Human Capital/Employee Welfare
• Stakeholder Engagement
• Employee Health and Safety
• Human Rights • Product
Stewardship – Social Topics
• Ethics • Supply Chain • ESG Management
Framework • ESG/Sustainability
Reporting
Social Governance
In addition to those areas covered during a standard due diligence review, Ramboll Environ covers the following additional topics:
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WHAT WE COVER: SECTOR-SPECIFIC ESG TOPICS
• Assessment also includes “sector-specific” ESG topics
• Sector-specific topics identified based on:
1) Ramboll Environ experience and professional judgment within the given industry
2) Publicly available information on industry-specific material topics
• Topics may overlap with sector-neutral ESG topics
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EXAMPLE SECTOR-SPECIFIC ESG TOPICS: OIL & GAS EXPLORATION & PRODUCTION
Environmental
• Environmental Management System (EMS)
• Energy and Greenhouse Gas (GHG) Management
• Water Use and Impact
• Biodiversity and Ecosystems
• Climate Risk and Resilience
• Waste and Materials Use
• Product Stewardship – Environmental Topics
• Air Quality
• Human Capital/Employee Welfare
• Stakeholder Engagement/Community Relations
• Employee Health and Safety and Emergency Management
• Human Rights, Security and Rights of Indigenous Peoples
• Product Stewardship – Social Topics
• Business Ethics & Payments Transparency
• Supply Chain • ESG
Management Framework
• ESG/Sustainability Reporting
• Reserves Valuation & Capital Expenditures
Social Governance
Bolded items are those considered potentially material topics
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EXAMPLE SECTOR-SPECIFIC ESG TOPICS: CHEMICALS MANUFACTURING
Environmental
• Environmental Management System (EMS)
• Energy, Feedstock Management, and Greenhouse Gas (GHG) Management
• Water Use and Impact • Biodiversity and Ecosystems • Climate Risk and Resilience • Waste and Materials Use • Product Stewardship of
Chemicals and GMOs • – Environmental Topics • Air Quality • Product Design for Use-
Phase Efficiency
• Human Capital/Employee Welfare
• Stakeholder Engagement
• Employee Health and Safety
• Human Rights • Product
Stewardship of Chemicals and GMOs – Social/Safety Topics
• Ethics • Supply Chain • ESG Management
Framework • ESG/Sustainability
Reporting • Political Spending
Social Governance
Bolded items are those considered potentially material topics
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RAMBOLL ENVIRON ESG DUE DILIGENCE REVIEW PROCESS
Client dialogue Gather client’s expectations about most important ESG topics to cover
Written questionnaire Develop customized list of questions for sector-neutral and sector-specific ESG topics
Telephone interview Follow up on questionnaire responses with an interview of appropriate ESG corporate personnel
Document and database review Review ESG documents provided by Company and publically available databases
Report Summary of Company’s awareness and management of pertinent ESG topics
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COMPARISON OF SCREENING LEVEL DD REVIEW TO FOCUSED ESG ASSESSMENT
Outcomes of Screening-Level Review • Multidisciplinary review of
Company’s involvement with 16+ ESG topics
• Corporate awareness of individual ESG topics and their relevance to Company operations
• Level of Company’s sophistication: Breadth of understanding across
multiple ESG topics
Depth of understanding within a given topic
Outcomes of Focused Assessment • Based on the results of the
screening-level review, assessment focuses on most pertinent and material ESG topics
• Where does the Company stand with respect to its competitors in the same industry (i.e., benchmarking)?
• Identification of potential risks and opportunities of material ESG areas
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EXAMPLE POST-TRANSACTION SERVICES Ramboll Environ has a multidisciplinary team with the expertise to complete a focused review of individual ESG topics after the due diligence phase and recommend possible follow-up actions to mitigate risks and pursue opportunities
Examples of our capabilities to create value out of the identified risks and opportunities include:
• Develop strategies and tactics for specific sustainability/ESG topics; e.g. climate resilience plan, water risk assessments, product lifecycle assessment
• Complete operational efficiency inventories (greenhouse gas, energy, water, and/or waste), audits and improvement plans
• Develop meaningful supplier ESG surveys and plans
• Prepare or review sustainability reporting (per GRI, CDP, UNGC)
• Develop sustainability metrics, and data collection and tracking tools
• Create effective management systems for ESG/Sustainability
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FOR MORE INFORMATION
Adam Johnston, Principal
Christine Ng, Manager
Lisa Grice, Principal
Kelly Guyton, Manager
User Perspective – Case Study
• Borrower: Garment designer and distributor
• U.S. Operations low risk – leased office and warehouses
• Manufacturing outsourced to 12, 3rd party manufacturers in China
• Pre Loan Diligence: – Desktop review of warehouse
locations – Review of Company “Supplier
Code of Conduct”
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Situation
• Administrative Agent
• Distressed Debt/Restructuring
• Exploring potential to convert debt to equity
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Pre Loan Diligence
• Desktop environmental review of warehouse locations
• Review of Supplier Code of Conduct
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Supplier Code of Conduct
“ We audit our suppliers to ensure they comply with our Code of Conduct including sections on forced and child labor. Our auditing program evaluates all factories, and their subcontractors.”
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CSR Diligence Scope of Work
CSR Audits were at 3 supplier locations. Selection Criteria:
• Mfg capacity largely dedicated to borrower manufacturing
• Supplier critical to continued operation
• Supplier was not used to manufacture “big name” garments
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CSR Conclusions
• Sites were generally well managed with no serious violations such as child/forced labor
• No conditions were identified that would be expected to present a hazard to employees
• 43 findings remaining
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CSR Conclusions – Priority Findings
1. Employees are not correctly compensated for all overtime in certain circumstances
2. Employees are paid “by the piece” instead of on an hourly basis at one supplier location
3.Certain permits relating to kitchen operations and other environmental/business operations were outstanding
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Resolution of remaining findings
• GE shared the findings of the Environ review with company management
• Clauses related to management accountability for environmental matters and CSR reviews at 3rd party auditors were added to the shareholders agreement as a measure to ensure that management maintains CSR audit protocols going forward
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Resolution of remaining findings
• GE shared the findings of the Environ review with company management
• Clauses related to management accountability for environmental matters and CSR reviews at 3rd party auditors were added to the shareholders agreement as a measure to ensure that management maintains CSR audit protocols going forward
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