Can ESG increase the value of your Business and appeal to Investors?

What is ESG?

Environmental, social and governance (ESG) standards measure the impact a business has on society and the environment and shows to what degree the business is transparent and accountable for that impact.

In this time of ‘conscious capitalism’ the way that a business manages the impact it has on society and the environment is an increasingly fundamental aspect of business strategy as opposed to a ‘nice to have’. Embedding ESG business practices into the business strategy can have an impact in terms of customer acquisition and retention, the ability to attract investment and can add value to the business which may be reflected in the price paid upon exit.

Examples of environmental business practices would be to reduce landfill waste by adopting recycling or the use of biodegradable materials in sustainable packaging.

Social business practices could include, the promotion of workplace equality through diversity and inclusivity policies, and the prevention of supply chain abuses by implementing and monitoring a rigorous modern slavery policy.

Governance business practices are linked to the environmental and social business practices, and an example would be reporting business strategy and financial performance accurately to stakeholders.

Advantages of embedding ESG into your Business

In addition to attracting new customers with sustainable products or packaging which in turn can appeal to new investors with enhanced returns, based on a better allocation of capital for the long term such as sustainable plant and machinery. ESG business practices can attract ESG-minded talent, reduce business costs through lower energy consumption, and earn subsidies by adopting government policy.

What if you don’t embed ESG into your Business?

The damage that unsustainable products have on the environment can lead to lost sales with ESG-minded customers, and the business may miss out on investment if investors choose more eco-conscious businesses.This may lead to a loss of competitive advantage and make the business less appealing to prospective investors and buyers.

The stigma attached to companies that do not embed ESG practices in their business strategy may lead to a narrow pool of talent and recruitment issues. Also running outdated high-energy usage machinery could potentially lead to penalties. 

Increase the value of your Business with ESG

The main problems facing the world today are generally interconnected and interdependent, and if society continues to move towards a compliant position, it is logical that businesses should adopt an ESG business strategy, in particular where it can be demonstrated to stakeholders that doing so will have a positive impact on the bottom line.

Reports suggest an increase in ESG motivated transactions with businesses adopting modern slavery, anti-bribery, and environmental business practices to maximise the value of the business prior to exit.

However, an ESG business strategy is not something that can be implemented at the due diligence stage of a transaction as the business needs to address its current business practices that should adopt ESG standards. It is also important to understand what ‘good’ looks like in your industry, project how ESG standards will impact the operation of your business, obtain cross-organisation buy-in and plan for future technological adjustments.You can break ESG business strategy into manageable pieces and should be prepared for ongoing change based on new economic and regulatory requirements.All of this of course will take time and the plan that is likely to be measured over years.

How does ESG impact the sale of your Business?

An article from one of the top 4 global accountants during2022 suggested investors will potentially pay 10% – 20% more for a business with good ESG credentials. However, the collection, measurement and reporting of ESG data is not subject to an agreed framework and therefore makes comparisons between businesses for valuation purposes very difficult. This could impact the timeframe to agree the purchase price before finalising heads of terms.

A business with strong ESG policies, goals and performance may find the purchase price is enhanced. If responses to the buyer’s due diligence enquiries reveal any gaps in relation to ESG polices, agreements or measurements the buyer may require the purchase price to be lowered during the negotiation of the legal documentation, therefore the seller must ensure its due diligence is comprehensive and well-organised during the due diligence process.

Need more help and information?

If you would like any help and business law advice in relation to how an ESG business strategy can add value to your business, please contact our specialist corporate team on 0151 305 9650 or email hazel.walker@glenvillewalker.com

This article is not intended to be interpreted as advice.

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