Responsibility frameworks are a good start. But, as Natasha Morris of Adamantem Capital explains, it is only by fully integrating ESG into investment decisions and portfolio management that private equity firms will realize its value
Responsibility frameworks are a good start. But, as Natasha Morris of Adamantem Capital explains, it is only by fully integrating ESG into investment decisions and portfolio management that private equity firms will realize its value
Nothing shines a light on the importance of considering environmental, social, and governance (ESG) principles quite like a global pandemic. COVID-19 has made clear the link between a good understanding of ESG risks and opportunities in a business and the ability to manage its financial and operating performance during uncertainty.
The importance of ESG as a value enabler has come into sharp focus. For private equity it presents a big opportunity to re-tool economies through considered, sustainable investments. It will be a competitive and differentiating factor for attracting capital in a post-COVID world.
ESG as an End-to-End Solution
When it comes to fully integrating the consideration of ESG risks and opportunities into investment decision-making and portfolio company management, the practice is still in its infancy in Australia. A Responsible Investing Policy framework is important, but for ESG to truly contribute to the creation of long-term value, it needs to be embedded into investment decision-making and portfolio management.
The process should begin at the investment evaluation stage by fully integrating the consideration of how ESG risks and opportunities could impact business performance within the broader commercial due diligence process. This active incorporation of responsible investing needs to be carried through into portfolio company management, where it exists as an underlying value driver, guiding companies to evolve or adapt in line with best practice.
At Adamantem, we work with management in due diligence and through the investment to address the business-specific risks and identify opportunities that may emerge from our ESG analysis. This might include reviewing a company’s carbon footprint, approach to risk management, data and supply chain security, or workplace diversity. Most importantly, we are always cognizant of how our contribution, such as investing in additional talent, equipment, or bolt-on acquisitions, will impact the business long after our ownership period.
Using this ESG lens broadens the range of stakeholders that we, and our portfolio companies, consider as part of everyday decision-making, from employees, customers, and suppliers all the way through to the communities and environments we operate in. This means we are in a better position to develop an agile response to disruption (see below: 'De-Risked through ESG').
From Fad to Function
We do not see the focus on ESG as a passing trend. We can already see the relationship between positive impact and investment performance, and how we can deliver better outcomes for investors and enable the wider transition toward more sustainable economic activity.
Some observers question whether investors will maintain their focus on ESG once we are out of the pandemic and economies improve, or whether recent uncertainty will fuel risk aversion. We firmly believe there’s never been a better time to fully integrate responsible investment approaches, taking something positive from this crisis and using it to drive investment and support management teams and companies in creating a more sustainable future.
De-Risked through ESG
Adamantem’s portfolio companies founded their COVID-19 response plans on existing frameworks developed from ESG analysis. Robust identification of risks generated effective approaches to managing those risks and ensuring business continuity.
For example, one of our portfolio companies with numerous global supply chains had invested in strengthening and de-risking its supply chain, including implementing new inventory management processes to optimize stock. The work that was underway proved critical mid-pandemic as it afforded management the ability to quickly assess, analyze, and react to ensure minimal disruption to operations.
Another of our portfolio companies had recently developed new, robust governance practices, including the implementation of a business-wide risk management and reporting framework. This framework provided a very effective resource during the pandemic and equipped management with the tools to analyze, address, and accurately report the COVID-19 risks.
About Natasha Morris
Natasha Morris is Director, Responsible Investing at Adamantem Capital, a private equity firm with more than A$1bn in FUM. Focused on mid-market opportunities in Australia and New Zealand, our ambition is to deliver consistent returns for investors by supporting management teams to take risks, create change, and grow value. Adamantem is a signatory to the UN PRI, and a member of the Responsible Investment Association Australasia and the Climate Active Network.
www.adamantem.com.au
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