Comment: ESG in C-19

In the midst of a crisis on the scale of the Covid-19 pandemic, you could be forgiven for thinking that “soft” concerns like ESG should take a back seat in the private equity world. If anything, the opposite is true.

ESG is still very much front and centre of the agenda in the PE sector right now. No, really. Despite the Coronavirus pandemic, ESG is actually in the middle of all this. And yes, the crisis has a huge and visible impact on the environment – riding a bike in the city is a new experience for many of us and a nice reminder that all our efforts to reduce the consequences of climate change are worth the effort! But the main difference now compared to pre-Corona times is that it’s the “G” within the ESG canon that is taking centre stage. For every private equity firm and their portfolio companies, governance is – or should be – top of mind. We have learnt from past experience that in times of a major economic stress, good governance can make the difference between success and failure, between survival and bankruptcy.

For private equity firms, governance has always been the part of ESG that was considered “routine”, and therefore has perhaps suffered on occasion from a lack of attention to the forensic details. After all, isn’t our business model all about improving the governance of the businesses we invest in: aligning the interests of the owners and the management team, professionalizing the leadership teams, bringing in outside experts to board positions, and providing the platform for businesses to grow in new markets and countries?

The element of governance that can often be overlooked is in defining the core values of each business. These values guide all of the company’s strategic and operational initiatives, and in times of crisis provide a vital framework within which the company can operate.

At Riverside, this philosophy is crystallised in our ESG work. The Riverside ESG Index that measures the standards in companies in the DD phase and later when we are invested, is actually called ESG & V Index. V stands for values. By taking values out of the governance, we highlight the relevance that values have in our investment approach. For that we also do background checks in our initial DD that include the reputation of the management teams.

These must-have governance standards include the definition of all processes and protocols in a portfolio company. Having these in place pays off at times such as this, as they act as a framework, making it relatively easy to put in place processes around social distancing, sanitary policies, testing, isolation and so on.

It is also our responsibility as owners of businesses to ensure that the actions of management teams reflect these high values: loyal suppliers should be paid, customers need to be well-informed, and – crucially – all options must be explored to retain staff. This is where the S in the ESG comes in big time. Where difficult decisions have to be taken, it is the GP’s duty to help inform staff (both about their own situation and that of the company) and give them all the support they need in terms of access government compensation, as well as assistance in areas such as mental health and counselling.

Communication is another element of governance that becomes even more important at a time like this, both in the way companies communicate with their stakeholders, and how private equity firms interact with investors.

Right now, LPs need all the information about their portfolio that they can get their hands on, and GPs have the opportunity to really prove their worth, providing maximum transparency and detail. Firms can look at performance on a month-to-month, week-to-week and even day-to-day basis to give their LPs a clear sense of how their portfolio is being impacted by the pandemic.

Some may think of this as overcommunicating, and yes, LPs can sometimes be deluged with information, not all of which they find useful. But today is a different market, and investors at all times need to feel like they have a clear picture of exactly what is happening to their capital. There really is no “over-communication” in a crisis.

Dörte Höppner is Chief Operating Officer of Riverside Europe