It’s fair to say that Environmental, Social and Governance issues probably aren’t the first things that come to mind when you are considering selling your business. The short list would include ensuring financial records are up-to-date, supplier and customer contracts collated, legal and compliance review completed and a realistic valuation in mind. Yet linked to the inevitable aspects of due diligence, preparing an ESG due diligence ahead of your potential sale is likely to pay dividends. Tom Otley, Sustainability Director at Oury Clark explains why.
Why an ESG Due Diligence pays dividends
- Risk Mitigation: just as when selling your house you’d want to ensure there were no last minute stumbles that could affect the process, so identifying and addressing ESG risks early can prevent inconvenient problems. This includes environmental liabilities, social issues, and governance concerns that could otherwise deter buyers.
- Enhanced valuation: as well as avoiding risk, ESG factors are increasingly important to investors and buyers, potentially enhancing the perceived value of your business. Increasingly it is a necessary condition of investment by Private Equity, for instance.
- Regulatory Compliance: while you may be complying with current regulations, those considering purchasing your business will be considering the value of your business against a backdrop of evolving regulations and will want to future-proof their investment against upcoming regulations
- Market differentiation: your business may already have a distinctive USP compared to competitors, but buyers are increasingly looking for companies that align with their own differentiation – which may well include sustainability goals and values
- Operational efficiencies accrue to well run businesses, including energy-efficient practices and strong governance to smooth decision-making processes
- Stakeholder Trust: companies are no longer considered solely from the perspective of shareholders / owners. Building trust with all stakeholders, including customers, employees, and the community will enhance your reputation and make it more appealing to buyers
What steps should you take?
Whether you prepare an ESG due diligence using your own internal resources or employ an external expert, consider the following:
- Identify the most relevant ESG issues – this will include environmental impact, but if you are an IT business, the most material issues may be Social (staff attraction and retention, for instance)
- Evaluate how these factors affect your business operations and profitability
- Create a baseline – be honest and give yourself a mark based on an internal audit (not easy if you are using internal resources, but not impossible either). This would include reviewing policies, practices, and outcomes related to ESG
- Make a plan around ESG. If it aligns with your business goals and addresses gaps, for instance it contains a gap analysis, includes measurable targets and timelines and you intend to integrate it into your business plan, you can term it as part of your strategy
- Start to implement the actions you have identified. You don’t have to have done them all but acting on them shows you are serious and you have that baseline from which to remonstrate progress and can use software (or an Excel spreadsheet) to show that progress
- Talk with stakeholders – suppliers, customers and investors – tell them about your ESG efforts and build alliances
Consultants can help you with all of this (of course) but they can also help benchmark you against industry standards and identify risks and opportunities. They are also more likely to give you an independent assessment of your own ESG health – and also help you identify some material ESG issues you may have neglected. They will also help you with communication (reporting) and could also provide training to senior staff, if desired.