"A sustainable approach to investment means higher returns," say Jean-Rémy Roussel, Managing Partner of CVC, and Chloë Sanders, ESG Director of CVC.
CVC Capital Partners, which has over $80 billion under management in Private Equity and credit, fully integrates ESG issues into its approach to value creation for all its investments. Jean-Rémy Roussel, Managing Partner and Head of Private Equity, and Chloe Sanders, ESG Director, explain CVC 's ESG approach to investment.
How does CVC integrate ESG issues into its value creation plan, and why?
Jean-Rémy Roussel: When we invest in a company with a view to creating value, we don't just look at the most obvious factors such as cash flow, sales and profitability. Indeed, we also look at the more fundamental drivers of value creation, asking how we can gain market share through sustainable and responsible management. Environmental, social and governance issues play a key role here.
We engage in dialogue with the company's management team to find out how to really improve the "fundamental drivers of value creation" while taking costs into account. You can gain market share simply by satisfying your customers, thereby building loyalty and encouraging them to recommend your company.
We have identified five levers of value creation: the workplace, the community, the market, the environment and governance. Some of these levers won't necessarily improve your profitability in the short term, but they will be decisive in the medium and long term. You're unlikely to get a higher price when you sell your company if you've been content to cut costs; you need to improve the fundamental drivers of the company's value creation.
What are the first steps in improving the fundamental drivers of value creation?
JRR: In our dialogue with management teams, we start by looking at the customer - we collect data on customer satisfaction, paying particular attention to those aspects in which we are less well placed than our competitors. If you invest in a company that suffers from negative customer feedback, and five years later that feedback has become positive, you will most certainly have gained market share and created value.
We then ask employees how to retain talent and improve employee commitment and satisfaction. It's vital to understand their values and motivations, and to promote them. For example, we'll look at the company's commitment to the community and the environment, and encourage it to implement environmental initiatives as well as community, training and education projects. Your employees are more motivated if you apply the core values with which you wish to associate your image.
When it comes to climate change and environmental issues, it is possible to obtain very precise data on a company's current consumption of natural resources and carbon footprint. This data can be used as a basis for agreeing with the company what improvements it intends to make, and how it intends to get there. If you can do this while reducing your long-term costs and improving the quality of your product or service, then you can also greatly improve customer satisfaction and have an environmental impact.
Generally speaking, good governance means putting the rules of engagement first, and making sure you know and apply your professional practices, ethics and deontology. It's just common sense. In fact, the merits of this approach are absolutely indisputable, since it reduces the company's risks and improves its bottom line. It's as simple as that.
ESG strategies are long-term in nature, whereas most Private Equity investments are held for shorter periods, typically four to five years. How can we reconcile the two?
JRR: This is a question we are often asked by management teams. In the long term, and even in the medium term, there's no doubt that it's better to have better quality products, more motivated employees and a more positive impact on the environment. Some managers sometimes object that short-term financial factors make change impossible, and I invite them to think again, as this approach will always pay off in the end. Sometimes we have to consider customer satisfaction in the short term, and we don't think that's unwise, even if the return on investment is 5 to 10 years away. So we strive to lay the foundations for sustainable, long-term growth and value creation, which will continue long after we have exited this investment.
But if you make your long-term strategy clear to your employees and customers, and they see that you are acting with integrity, you will also begin to earn their trust and loyalty. It's vital for the management team to set the tone.
Can you give an example of a portfolio company that has placed ESG issues at the heart of its value creation strategy?
Chloe Sanders: A good example is Continental Foods, a leading player in the European food sector, which was acquired by CVC Fund V in 2013 and sold last year to GBFoods. During the time it has been in our portfolio, the company has significantly increased its market share. This performance is mainly the result of the tastier, healthier recipes adopted by all the brands in Continental's European food portfolio, but also of the priority given to improving the efficiency and sustainability of operations and the customer experience.
A quote from Thomas Bittinger, Managing Director of Continental Foods, aptly describes his approach to ESG issues: "Business strategy must always integrate environmental, social and governance issues. In fact, the levers you need to pull to improve a company's performance are the same as those required to give greater priority to ESG issues," he asserts. "A company that offers excellent products and has an agile, efficient organization is in a position of strength in the marketplace. To achieve this, all ESG issues, from employee motivation to energy efficiency, can and must be taken into account.
How do you adapt your ESG approach to different types of business and sectors?
JRR: Whether your customers are individuals or businesses, and whether you're a goods or services company, you apply broadly the same principles. The main adaptation measures concern operational aspects: it's a question of examining all the links in your supply chain and ensuring that you prioritize the aspects that are most important to the company.
It may be necessary to adapt the corporate culture to the country in question, as the notion of diversity does not have the same meaning in different local cultures. The same applies to the environment and community involvement, which may be perceived differently by employees and customers, even though the fundamentals are identical. When it comes to reporting and assessing progress, you need to adapt the ratings and data measured, but the key is to measure the factors that are fundamental to the business, such as employee engagement or environmental impact, so that you know where you stand and can set targets for improvement. If you measure ESG factors and track their evolution, you have the opportunity to manage them.
What mechanisms have you put in place to track the evolution of environmental, social and governance aspects within your portfolio of companies?
JRR: We have developed three methodologies. Firstly, the operational team works alongside the investment teams to engage in dialogue with the management team. We give them three to six months to work out their new corporate strategy, setting new financial targets and drawing up a comprehensive value creation plan based on sustainable, responsible growth. Thereafter, at each board meeting, we monitor progress against objectives.
Secondly, we have defined a series of non-financial indicators based on external programs that measure progress in areas such as customer satisfaction and employee commitment, environmental impact, community initiatives, anti-corruption policies, etc. For customers, we focus on Net Promoter Scores, which measure the willingness of customers to recommend a company product or service to others. For customers, we are interested in Net Promoter Scores, which measure the willingness of customers to recommend a company product or service to others. As for employees, we send them questionnaires that enable us to measure progress very effectively. Suppose, for example, that you acquire a company and 70% of its employees say they would not recommend it to their friends. However, if you turn the situation around so that a few years later, 70% of them say that they enjoy their work at the company, that their remuneration is adequate and that they are well rewarded for their efforts, then you have improved the company's situation.
In other areas, such as sustainable purchasing, the environment and ethics, a number of leading organizations offer ratings that enable us to monitor the progress made by the company. Finally, we have our own assessment process, which involves collecting company reports and asking our external auditors to carry out periodic audits to validate the answers given.
Chloe Sanders: When it comes to the internal assessment process, we engage in dialogue with a large number of different companies from a wide range of industries. Some of the questions apply to all companies, while others are adapted to suit the person we're talking to. It's not a one-size-fits-all formula.
You place customer satisfaction at the heart of your ESG strategy. Can you give us a practical example?
CS: A good illustration of this approach is provided by Sunrise Communications, the Swiss telecoms operator. When we entered the complex and challenging European telecoms market in 2010, Sunrise customers were dissatisfied, not least with the pricing structure in place at the time.
With the help of CVC, Sunrise has radically changed the customer experience by investing in a quality improvement plan and innovating with the launch of differentiated packages and price plans. Improving the overall customer experience has enabled us to achieve much higher levels of satisfaction and greatly enhance the company's reputation and brand positioning. At the same time, to ensure that employees' expectations are met, we have implemented a comprehensive employee engagement program and made the payment of management team bonuses conditional on customer satisfaction and employee engagement targets.
As a result of these improvements, Sunrise won awards for best telephone network and best customer service, and convinced tennis world champion Roger Federer to become a brand ambassador. In the final analysis, all these initiatives proved to be highly value-creating for CVC prior to Sunrise's listing on the Zurich Stock Exchange in 2015.
What are your reasons for putting these issues at the heart of your priorities? Is it pressure from institutional investors (LPs)?
CS: I've been discussing environmental, social and governance issues with investors for almost 10 years now, and I've noticed for some time that investors are becoming increasingly aware of these issues. Investors who talk to us about environmental, social and governance issues are very well informed, and they ask for much more detailed information about the companies in their portfolios. They want to better understand our global approach to major global challenges. This has a lot to do with their self-imposed obligations to meet their own ESG commitments.
We have long been a signatory to the Principles for Responsible Investment (PRI), and more recently became a member of the PRI Private Equity Advisory Committee (PRI PEAC). As such, we play an active role in discussions on these issues within the finance sector. And, of course, these issues are of interest not only to our investors: our portfolio companies, their management teams, associates and employees are asking us to do so, precisely because this approach corresponds to their values.
JRR: Investors are now very aware of these issues, asking very specific questions, and they now want to entrust their money to investment managers who place them at the heart of their priorities. They need to take responsibility themselves, and we encourage them to ask questions and get involved. What's more, Private Equity has considerable influence, so our industry can have a significant impact. I firmly believe that far from being incompatible, returns on investment and ESG issues go hand in hand to create value for our investors.
Of course, it's important to improve financial performance, but it's also necessary to look at all inputs so that the company can create value and generate a high return on investment, thereby improving its bottom line. I also think it's worth pointing out that ESG issues themselves are an attractive and fast-growing sector. Just as we do for our portfolio companies, many companies want to measure their own ESG indicators. That's why we recently invested in EcoVadis*, a CSR performance evaluation platform, to meet this growing demand.
*EcoVadis, a French unicorn, is featured in Vintage Altaroc Odyssey 2021.
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