ESG Journey
Palatine Private Equity is making the case for ESG in private equity.
Palatine Private Equity is unusual in the private equity world in that it has been looking at the ESG agenda for the best part of a decade.
Beth Houghton heads up the firm’s Impact Fund which specifically invests in companies that are making social or environmental change, while she also sits on the British Venture Capital Association Impact Committee which promotes returns-focused impact investing.
She says the move to embrace the ESG agenda was originally prompted by clients who were increasingly asking about ESG. So Palatine worked up a methodology and began collecting quantitative ESG data across six pillars (see far right). Before it makes any investment the firm now carries out a pre-deal ESG review to see how it performs against these range of metrics.
As she says: “It’s a good way of ensuring there are no red flags which would prevent us from investing. If we decide to then invest we then scope the company against the six pillars which creates a set of very detailed KPIs.”
To deliver on the agreed KPIs Palatine then implement a number of specific measures across its portfolio such as helping companies improve their climate footprint, promote better diversity and inclusion, and improve employee wellbeing. On exiting a business Palatine likewise collates ESG data and analysis across the investment period to assess progress, achievement and positive impact.
Attraction
Five years ago Palatine went to the market to raise £100m for a specific impact fund and has since made 10 investments. Such has been the success of the first fund that it now has plans for a second.
Houghton says the fact that Palatine is known for its ESG credentials is a real attraction for management teams. “We are committed to using our expertise to guide and support mid-market management teams to strive for better ESG performance alongside financial performance. Sustainability is embedded into everything we do, but it’s a big team effort that involves us and our portfolio companies working collaboratively, sharing best practice and helping each other. Companies often lack knowledge on how they can be more sustainable and we can help them get up the learning curve a lot quicker.”
She adds that there are huge benefits for companies. “Our evidence from 12 years of collecting detailed ESG data shows a strong correlation between those companies which score the highest on ESG and those which deliver the best returns. The evidence has helped prove to business owners that adopting a proactive approach to ESG does not mean adding costs into your business but shows it has a significant impact on the overall value of your business. Companies now really see the benefit.”
Houghton says one particular benefit is that it makes companies more resilient to external shocks, such as we are seeing now from rising energy prices and inflation, while she says having strong ESG credentials is really important in terms of attracting staff too.
Sustainability is embedded into everything we do, but it's a big team effort that involves us and our portfolio companies working collaboratively.
Case study
She cites the example of TTC, a company that delivers national speed awareness and other drive safety courses, as one that has benefitted from this focus of ESG. Palatine invested in the business in 2017 and has since successfully scaled the company’s business with police forces while also diversifying into cycle training.
“Following our baseline review the company’s existing ESG credentials were already good but it had not yet joined its ESG efforts together and given it a clear rationale within the business strategy or prominence within the team. We helped it create a strategic sustainability framework to give its ESG initiatives more purpose and direction, and the company formed an ESG taskforce to develop a sustainability strategy and framework.”
Palatine went on to complete a successful exit from the business in 2021 with TTC reporting revenue growth during the investment period from £27m to £40m. “This shows how embracing ESG is not mutually exclusive from continuing to make excellent returns.”
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Journey
Looking ahead Houghton is keen to stress that ESG is a journey and that other issues such as biodiversity are likely to become part of the ESG mix too.
“It is about constantly improving your business. There is always more that we can do to ensure that ESG is considered with the same weight as other investment considerations and measures of success. There is still a long way to go. It has taken us 12 years to get here but ESG doesn’t stand still and will constantly evolve. Investors who think they can just switch on an ESG tap are wrong.”
When it is making investments Palatine builds its ESG model around a six pillar framework:
- Climate
Strategies for climate resilience and the transition to net zero - One Planet
Reducing the impact of business inputs and outputs through redesign, re-use and recycling - Supply Chain
Building ethics, sustainability and resilience into business supply chains - People
Creating positive workplaces that promote safety and wellbeing, and nurture progression and inclusion to allow employees to flourish - Customers and community
Meeting customers’ needs in the most responsible way possible and putting something back through purposeful community engagement - Leadership
Steering companies towards robust management of business ethics, risk and compliance and commitment to sustainable business practices
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