ESG Considerations for Investment Exit Strategies

As ESG performance has become a significant measure of business health, value, and longevity, communicating successful ESG management is vital in demonstrating the value of portfolio businesses and the success of investments on exit and maintaining a positive perception of both portfolio businesses and investment firms. 

Prioritizing ESG

Getting ahead of ESG issues and expectations is important to maximizing value, increasing returns, and establishing a firm’s reputation as high-quality and sustainable investors. With a wealth of due diligence experience and ESG expertise, RPS provides complete support for private equity firms on exit, from maximizing value at sale to demonstrating returns to investors. 

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Sell-side due diligence

Beyond good management, maximizing the value of a business means understanding what a potential buyer values and demonstrating that your business reflects their values. Comprehensive sell-side due diligence is therefore vital and should be conducted with a thorough understanding of the market and potential buyers’ priorities. Whether the target buyer is a leader in their industry, expanding into it, or another private equity firm, it’s important to speak to their priorities and be fully prepared to answer their questions.  

ESG considerations influence every corner of a business, from supply chain and product stewardship policies, to direct environmental and social business impacts, labor practices, and employee culture. As effective ESG management has been shown to reduce inefficiency and unnecessary losses, ESG considerations have become more significant among these market priorities.  

Value protection

From inefficiency to liability, ESG failures are expensive. With possible legal, reputational, and financial costs to ESG mismanagement, understanding the ESG landscape of a potential acquisition is increasingly important in value protection. No matter their background, any potential buyer should be assessing ESG issues and opportunities during their purchase process.  

Value protection is a priority for buyers and sellers alike and poor ESG management can impact the value of a business at sale. Identifying weaknesses in ESG management give private equity firms the chance to identify any failings before they become a problem, addressing those they can and preparing the right response to those they can’t. A complete understanding of the nature of a portfolio company’s ESG management successes and failures allows firms to get ahead of buyers’ questions before they arise, and present responses in the best possible light. 

For firms exiting an investment, it is vital to be prepared to respond to any questions or challenges a potential buyer may identify during their diligence process. With the increasing value placed on good ESG management and low ESG risk, this means conducting a comprehensive sell-side ESG review. 

Value creation

Sell-side due diligence is an also opportunity to demonstrate and build upon ESG successes. It gives firms the chance to emphasize improvements made, highlight opportunities available, and demonstrate where effective management structures are in place. Preparing a comprehensive report for prospective buyers gives firms the ability to present a complete picture of an asset and its value. 

Impact of effective ESG

More than a chance to protect value, sell-side due diligence allows firms to demonstrate the value they have added to an investment. Exit is the opportunity to reap the rewards of effective ESG integration and demonstrate the progress made throughout asset ownership. Key goals and any KPIs utilized to measure ESG performance can be compared on exit to their earliest implementation, and to industry benchmarks, to quantitively communicate the impact of your ownership on business value. The impacts of any firm-level policies can also be identified and highlighted for investors.

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ESG management reporting

While exit may signal the end of an investment, it is not an end to the private equity lifecycle. The performance here can significantly impact how firms perform when fundraising for subsequent investments – the next stage of the cycle. Maintaining investor satisfaction is the key to ongoing success throughout the private equity lifecycle.  

With investors expecting increased transparency from firms and prioritizing corporate and social responsibility and sustainability, good communication of ESG management is vital to the maintenance of investor confidence and to securing capital for future investment cycles. Firms can use the information gathered during sell-side due diligence to produce ESG management reports for current and potential investors. They can present evidence of their responsible investment practices to reassure current and potential investors. 

Good ESG at Exit

At exit, good ESG management is about good communication. Producing a combination of reports, from sell-side ESG due diligence to highlight growth opportunities and maximize brand value, to comprehensive ESG disclosure to meet public market investor expectations, ESG management on exit is vital securing the reputational health of a firm. 

Oriented towards both buyers and investors, intentionally managing ESG at exit can help establish a competitive advantage at sale and demonstrate the high value of both your business and your firm as an investment. 

Our approach

RPS has the right combination of ESG and transaction advisory expertise to identify the ESG issues key to each firm and maximize the impact of diligence and communication at exit. From sell-side diligence reporting to investor relations, we help clients find the best way to communicate their ESG management decisions and successes. With a comprehensive understanding of the universe of possible ESG issues, and how they relate to our clients, we can help firms stay on top of external and internal stakeholder expectations, creating short and long-term value and strengthening their reputations. 

Effectively communicating ESG accomplishments can help: 

  • Highlight growth opportunities;  
  • Increase brand value; 
  • Establish competitive advantage;  
  • Meet investor expectations.  

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