FEBRUARY 08 2023
ESG is a highly significant topic for businesses, investors and policymakers across the world. Society is much more attuned to its importance, with the younger generation showing an ever-increasing commitment and concern for the climate. According to the World Economic Forum, young people between the ages of 16-25 are extremely worried or very worried about climate change (Buchholz, 2022). Here, Elin Ljung, Managing Director and Head of Communications & Sustainability at Nordic Capital Advisors, shares five insights into strong ESG practice for the year ahead.
1. Integrating ESG into every level of organisational strategy
It is increasingly essential to integrate ESG into every level of an organisation. This means educating different parts of the business and having clear areas of expertise and responsibility. At Nordic Capital, educational seminars, training and specific playbooks are among the tools used to enhance its own ESG commitment as well as within its portfolio companies. Nordic Capital’s clear focus on ESG performance has paid off. Today, every portfolio business is expected to have a Sustainability Roadmap in place and fully implemented into its business strategy – a demonstrable shift compared over the last five years. Companies that do not have clear sustainability objectives are trained and required to continuously achieve long-term sustainable improvement. Nordic Capital actively looks for target companies with a clear sustainability focus and how to back companies contributing to a sustainable transition and expects suppliers across the value chain to meet high ESG standards and commit to sustainable procurement.
2. A data driven approach to ESG
Having a data driven approach to sustainability and measuring impact with clear targets and goals is key to fulfilling stakeholder expectations. According to a recent study “Prioritising ESG is not optional anymore”, conducted by Forrester Consulting (2022), the most significant ESG-related challenges that businesses face are not having enough data (47%) and an inability to validate and trust data (46%). This is why Nordic Capital is backing the global ESG Data Convergence Initiative, which seeks to standardise ESG metrics across the entire PE industry. Achieving a “perfect” data set is difficult. Therefore, the industry needs to be pragmatic, using the available data to enable more sustainable investments decisions and not waiting for flawless data.
3. The global regulatory landscape and its jurisdictional differences
Policymakers, regulators, and responsibility-orientated organisations are setting new ESG regulations at a rapid pace, impacting both investors and businesses. Two current examples in Europe are the SFDR, the Sustainable Finance Disclosure Regulation; and the SDR, the UK Sustainable Disclosure Requirements. Both aim to redirect the flow of capital towards sustainable financing, but each is different in the way it categorises and defines. Nordic Capital has classified its funds to promote environmental and social characteristics and integrates sustainability risks and opportunities into every investment decision. In line with this, Nordic Capital promotes more transparency and disclosure of the sustainable performance. Looking ahead, one of the main challenges is how to converge global data. Global companies must understand what different regulations mean to them and how they must adapt to varying requirements in diverse jurisdictions.
4. An ESG lens can help companies better navigate in a downturn
The Covid-19 pandemic triggered one of the most significant global economic crises in over a century (World Bank Group, 2022). Now, current geopolitical tensions, supply chain disruptions and soaring inflation, mean businesses must navigate tough macro headwinds. By sharpening their sustainability approach, businesses can achieve a competitive advantage that in turn improves their resilience, manages volatility and helps to control costs. Moreover, according to a recent study by Paul Lavery from the Adam Smith Business School at the University of Glasgow, and Nick Wilson from the Credit Management Research Centre at Leeds University Business School, private equity -backed companies significantly outperformed their unsponsored peers in 2020 during the economic downturn caused by Covid-19. In fact, firms owned by private equity experienced higher growth in sales, assets, headcount and other key performance metrics in both 2020 and 2021 (Zhang, 2023). Nordic Capital believes that an increased commitment to ESG reporting and sustainable practice has played a strong hand in this better performance.
5. The transition to a low carbon economy
Business has a major role to play in transitioning to a low carbon economy and protecting the environment. However, the reduction of carbon footprint is also good for business. Energy efficiency technologies and measures together with the shift to more renewable energy sources help companies reduce their emissions which often means lower costs and greater operational resilience. Nordic Capital supports its companies to map energy consumption and take action to become more energy efficient with the help of its operations team and sustainable procurement toolkit.
Conclusion
The importance for private equity investors to invest responsible is becoming more crucial than ever. For companies looking for capital to scale their businesses and to attract talent, an owner with an ESG edge and focus can make a clear difference. To learn more about Nordic Capital’s sustainability approach, please go here: Our sustainability approach | Nordic Capital
Sources
Buchholz, Katharina. 2022. World Economic Forum. This chart shows global youth perspectives on climate change.
70% of young people are very worried about climate change | World Economic Forum (weforum.org)
Forrester. 2022. Prioritising ESG Is Not Optional Anymore.
DNB_Prioritizing_ESG_Isn’t_Optional_Anymore.pdf
World Bank Group. 2022. Finance for Equitable Recovery. Washington.
World Development Report 2022: FINANCE for an Equitable Recovery (worldbank.org)
Zhang, Hannah. 2023. The Pandemic Boosted the Case for PE. Institutional Investor.
The Pandemic Boosted the Case for PE | Institutional Investor