Philip Peeters (publisher and CEO of De Bestuurder) and Jan Alexander (secretary-general of the Belgian Venture Capital & Private Equity Association) discuss the study 'Companies in transition' by GraydonCreditsafe.
Philip Peeters (publisher and CEO of De Bestuurder) and Jan Alexander (secretary-general of the Belgian Venture Capital & Private Equity Association) discuss the study 'Companies in transition' by GraydonCreditsafe.
Is it a good idea for big companies to step in financially so that SMEs in their supply chain can meet their ESG obligations? Or can private equity play a role in this? Publisher and CEO Philip Peeters of De Bestuurder and secretary-general Jan Alexander of the Belgian Venture Capital & Private Equity Association (BVA) believe so, but it does place additional demands on the board of directors, which sees its traditional role of compliance and financial responsibility shifting towards risk management, innovation and sustainability.
According to a study by GraydonCreditsafe 16% of Belgian companies are not financially strong enough to meet ESG requirements. Among large companies, this amounts to 11.8%, and as much as 19.9% among SMEs. In other words, one in five SMEs is in danger of failing in the ESG field, which could sharply impoverish the economic fabric
GraydonCreditsafe puts forward some schools of thought that could help SMEs still get over the hurdle. Besides the introduction of a notional interest deduction, it also thinks of scenarios in which more capital-rich large companies financially assist smaller companies. This can be done by taking minority stakes in the companies in their value chain or by pooling resources with other companies, from which stakes can then be taken collectively.
"This cooperation or concerted emulation would allow companies to share costs and risks while taking social responsibility and having a major impact on sustainability," Peeters acknowledges. "In doing so, however, clear agreements must be made to ensure that the collaborations would not lead to dependency or competitive disadvantage."
A collaboration of large and small companies also places additional demands on corporate governance.
Peeters: "In classical agency theory, the focus of governance is on the relationship between shareholders and management, where compliance and financial responsibility are paramount. In a collaboration, directors are more encouraged to transcend the boundaries of their own company and work together strategically. Risk management, innovation and sustainability then gain in importance."
The transition is accompanied by a shift in the profile of the ideal director.
“Where until now the emphasis has been on supervision and experience, the new concept mainly requires flexible, strategic professionals with diverse backgrounds, skills and a broad network that broadens the strategic horizon of the company,” says Peeters.
Peeters: “Directors' core task is to guarantee the strategic direction and continuity of a company. Today, however, they face challenges that make making well-informed decisions difficult, including the need to meet European sustainability goals and the requirement to deal with geopolitical risks. That is why it is essential that we work on a robust economic ecosystem with a strong identity.”
In addition to collaboration between large and small companies, support from private equity can also help companies meet ESG requirements, for example by making additional resources available to them through a capital increase.
Jan Alexander of BVA: “Whether private equity takes a majority or minority stake is always inextricably linked to the growth story that management wishes to achieve. ESG or sustainability can be an important part of that growth story, for example to secure the company's 'license to operate' if it is active in a value chain that is in the process of becoming more sustainable and if it also must make efforts as part of that chain. But these are not necessarily isolated ESG investments, but investments in a broader financial and operational framework with an ESG opportunity angle. This can all be perfectly modelled and budgeted as part of a private equity investment file.”
“It becomes more difficult when it comes to investing in a company whose entire business model is no longer sustainable and is doomed to extinction because, for example, it is too carbon intensive and there are no decarbonisation options or because it only depends on production low-wage countries or a long logistics chain without a short chain aspect being possible in a profitable way. Today, these are more difficult investment cases for private equity from an ESG perspective,” says Alexander.
Alexander: “Testing an investment opportunity against ESG criteria in the due diligence phase should allow private equity investors to correctly assess the sustainability potential of the business model and map the maturity of the organisation in that area. It offers the opportunity to combine a 'red flag' check with a baseline measurement that should enable the private equity investor to analyse how much work needs to be done during the holding period to position the company in terms of ESG and sustainability. to set and/or maintain the correct rails.”
“Private equity investors are usually actively involved in the trajectory of their portfolio companies. That involvement usually translates into their presence on the board of directors, where their role is to ask the right questions and place the right emphasis about the growth of the company. Not only on a financial and operational level, but certainly also in terms of sustainability,” Alexander continues.
Alexander: “Growth in the field of sustainability exceeds ESG compliance. It is about developing an appropriate sustainability strategy that is compatible with the financial and operational growth story that is set by the board of directors and must be implemented by the management of the portfolio companies.”
“If the actions in this regard are properly implemented – whether it concerns a decarbonisation process or the optimisation of a policy to be an attractive and modern employer with high retention – a solid level of ESG compliance will follow automatically. Private equity investors also usually have important resources such as in-house or external expertise, tools and templates that they can make available to the management of their companies to translate their ESG strategy and plans into concrete actions,” says Alexander.
Can companies work together to meet the ESG threshold?
Alexander: “You notice that there are currently very few barriers between companies, both within and between the sectors, to exchange information and knowledge in the field of sustainability. Just look at the various platforms and network initiatives that exist in terms of readiness for the Corporate Sustainability Reporting Directive (CSRD). This certainly creates sufficient fertile ground to take the next step towards concrete actions in the context of the transition in the long term.”
“Cooperative business investments or collective purchases can certainly bring economies of scale to make the investments needed in the context of the transition feasible and feasible. It does require sound coordination and an appropriate government framework that, for example, removes barriers that would exist with an individual investment or purchase,” Alexander concludes.
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