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ESG: The bottom line

Lorna Kelly By Lorna Kelly,  June 14,2016

No business wants more red tape. But every business wants growth in profits and value. Dunedin’s Lorna Kelly explains how investment in sound ESG principles is a cost-effective and quick way to generate value.

We have learnt much from the Global Financial Crisis. The biggest lesson is that you must expect the unexpected. Donald Rumsfeld said there were known knowns, known unknowns and unknown unknowns. A surprisingly good summary, but how can you plan for events that no one can foresee without retreating into a bunker of risk aversion?

The answer – we have learnt – has its foundations in robust environmental, social and governance (ESG) practices. Some may feel that ESG has been forced on us by bureaucrats and institutions, from the Health & Safety Executive to the United Nations, with its Principles of Responsible Investment (UNPRI). Many businesses have resisted, or simply paid lip-service, to what they see as more red tape. We see it differently. Good ESG is about sustainability and that is good business.

ESG is operating to the highest ethical standards. It is responsible business practices and incorporating these guiding values into each decision you make in your business. It is an evolving framework, not a prescriptive set of rules. Put simply, it is thinking about the way you do things.

A well-run business has a sound ESG framework even if it doesn’t realise it. Do you try to reduce costs, such as energy? Do you know whether your suppliers use child labour? Do you look after your staff and customers? Are you part of the communities where you operate?

ESG matters are considered up front of a Dunedin investment during due diligence and then on an ongoing basis. Every year we conduct a detailed ESG survey on all our investee companies to see what progress has been made. It is not an arduous process. It is simply a way of formalising thought processes and actions, many of which you are probably already doing. ESG assessments are certainly not the preserve of large corporations. We find it is much easier to get a handle on how a company is operating at the ground level with smaller businesses.

There is much current research correlating strong ESG policies with better returns. Research by Pantheon, a global private equity fund investor, found that firms with better performance had below average negative ESG news profiles and stronger growth in valuation and EBITDA.

When do I see ROI?

The payback is surprisingly quick. Some initiatives, like changing energy supply, may take 12 months to feed through to the bottom line, while others, such as properly addressing how you’re managing, motivating and mentoring your staff, can generate instant improvement at no financial cost. Governance might sound grand but it is really as simple as making sure your organisation is well run and you know what is going on within the business.

It works. RED, a supplier of SAP experts to international corporations and consultancies, invested in SharePoint technology that has not only reduced the environmental cost of printing off board packs, it has also enhanced the audit trail for documentation. It’s good governance, good for trees and saves money. Same day courier service City Sprint only buys energy generated from renewable sources and uses routing software to avoid empty journeys; policies that appeal to both staff and customers.

Good ESG principles alone won't bullet proof your business. There is no way of doing that. But they will make more of the unknowns known and reduce risk without hurting the return. Ask yourself what “sustainability” means? It is the ability or capacity of something to be maintained or to sustain itself. It is not about how many trees you hug or about tying yourself up in red tape. It is about having a long-term future. Put it that way and the value is in plain sight.

If you would like to talk about how any of these issues relate to your business then please get in touch – lorna.kelly@dunedin.com

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