The ESG premium might be more valuable than you realise

This summer, Investec surveyed 500 mid-cap executives in the UK on the topic of sustainability alongside FT Longitude. This article is part of a series of insights that we’ve produced to help steer an important conversation about Environmental, Social and Governance (ESG) strategies.

In our research, a majority of UK mid-market businesses say that strong ESG performance will make their companies more attractive to potential investors, acquirers and partners. And 61% say that without an ESG strategy they are in a weaker position when it comes to negotiating or renegotiating finance. So are companies doing enough to turn sustainability into tangible value?

The survey finds that most companies (70%) are currently planning, implementing, or have implemented an ESG strategy. The vast majority of companies that already have an ESG strategy in place expect to see a positive impact on revenue growth as a result.

Jo Hunter, founder of food producer Piglet’s Pantry, says that a focus on sustainability is significant to her business. “It can only add value to the company,” she says. “It goes on the balance sheet in terms of profit and loss. It goes side by side with brand value. It’s one of the most important things we talk about nearly every day.”

In the research, those who are implementing, or have implemented, a strategy report a number of tangible benefits:

• 44% say they experienced improved brand reputation
• 39% report operational improvements and efficiencies
• 37% cite a stronger risk management strategy

ESG can open doors to finance

As expectations from banks and investors continue to grow, companies that are ahead on ESG could find it easier to secure funding.

Rishi Madlani, UK head of sustainability at Investec Bank plc, says that many large UK banks have pledged for their balance sheets to reach net zero by 2050. For some, this involves meeting interim targets by 2030, meaning they will want to work with companies that take their sustainability goals seriously.

“There is currently significant finance available for green-labelled assets,” he says. “As we get closer to 2030, there will be more competition for these assets and finance will need to be funding the transition. If banks are going to meet their net zero commitments, they’re only going to be able to finance customers that have similar goals. Access to finance will be predicated on progress.”

One survey of UK-based lenders has shown that 93% expect ESG-related lending in the mid-market to increase in the next few years. A big majority also said that a firm’s ESG status, or its ability to transition to net zero, influences credit risk assessments.¹

For many banks, such as Investec, ESG is a key factor in credit decision-making. It uses screening processes in certain areas of lending, such as management and due diligence questionnaires, to understand where a business is on the ESG spectrum. This is then factored in to credit decision-making. With certain products, it is possible for clients to receive margin incentives to encourage behaviour change. Banks also consider how serious the management team is about sustainability.

Showing that it is a priority is not just important to lenders, but to potential partners too. James Amar, strategy and CSR director of food importer RH Amar, says that this means sustainability is no longer an afterthought. “Some of the new business we've taken on in the last couple of years is from more ethical brand partners,” he says. “Within the context of a client or partner PowerPoint presentation, the subject of ESG is now at the start of the presentation — not the end. It sets out the stall in terms of talking about our values and how we like to do business.”

Investors are looking at ESG

Institutional investors are also increasing their focus on ESG. They are more likely to see companies with strong ESG performance as less risky, better prepared for uncertainty and more successful in the long term.²

In PwC’s 2022 Global Investor Survey, more than a quarter of the investors said they were willing to accept a lower rate of return on investment from a company that undertakes activities that have a beneficial impact on society or the environment.³ They also placed ESG-related outcomes such as effective corporate governance and reduction of greenhouse gas emissions among their top five priorities for businesses. Another survey by PwC of private equity firms found similar sentiments, and also revealed that an assessment of ESG factors is now standard practice as part of the deal process.⁴

What ESG data are investors looking for? There is no uniform approach, but according to EY analysis, it should be relevant and related to the primary activities of the company and be detailed enough to be comparable to peers.⁵

Steve Cunningham, CEO of consumer engagement company geo (Green Energy Options), says that embedding ESG reporting into day-to-day operations is crucial to doing it well. “If you’re running the process of reporting separately to what you do in your day-to-day, you'll always fail,” he says. “When it’s an embedded part of the business, the reporting aspects of achieving and maintaining B Corp, or any other standard, should be no more onerous than other internal processes.”

Is it crunch time for mid-market companies?

ESG regulation is developing rapidly in the UK and Europe, and it can be difficult for businesses to navigate multiple requirements — especially the divergence between different markets.⁶

This regulatory pressure can persuade companies to move more quickly on their sustainability strategies, but our research shows that access to finance and attractiveness to investors are also important reasons to press on.

Many mid-market companies already recognise the significance of ESG: 24% see ESG as a sizeable business opportunity, 55% say it is business critical and a similar number say it is fundamental to how a business should operate.

Ian Webb, CFO of schoolwear company Banner, says that leaders should wake up to the fact that ESG progress can be profitable. “Banks and debt providers are starting to write covenants around achievement of ESG objectives,” he says. “So it’s encouraging that there is cheaper money out there for organisations that do this well. This should obliterate the scepticism around ESG, because there are tangible examples of ESG developments turning into real money and cheaper debt.”

¹ https://www.grantthornton.co.uk/insights/esg-lending-momentum-is-building-for-the-mid-market/
² https://www.ey.com/en_uk/assurance/why-esg-performance-is-growing-in-importance-for-investors
³ https://www.pwc.com/gx/en/global-investor-survey/PwC-Global-Investor-Survey-2022.pdf
⁴ https://www.pwc.com/gx/en/services/sustainability/publications/private-equity-and-the-responsible-investment-survey.html#:~:text=Most%20PE%20firms%20aim%20to%20create%20value%20with%20ESG&text=More%20than%2080%25%20say%20that,with%20the%20pursuit%20of%20returns
⁵ https://www.ey.com/en_us/climate-change-sustainability-services/meeting-the-esg-data-needs-of-institutional-investors
⁶ https://www.thomsonreuters.com/en-us/posts/esg/2023-esg-outlook-europe/
 

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Opinions, interpretations and conclusions represent our judgement as of this date and are subject to change.