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by Megan Baxter 28th November, 2018
5 min read

Comply, Align and Lead – How GK assesses ESG Capability and Potential

GK regularly assesses the ESG (environmental, social and governance) capability of companies, often as part of a package of due diligence work undertaken for private equity clients.

ESG covers almost every aspect of a business, so it’s important to help companies and investors focus on the most material factors, i.e. the factors that will have the biggest impact on the company, its stakeholders and its long-term value.

This last point means it is essential to not only focus on a company’s current capabilities and performance but also on how well equipped they are to be resilient in the face of new risks and challenges and able to develop new opportunities.

We have found that investors and companies respond well to us distinguishing between three levels of ESG capability and performance:

  • Compliance
  • Alignment
  • Leadership

Compliance

All businesses must be compliant with the relevant legislation and technical regulations, and they need to have systems in place to ensure this.  But compliance should not be seen only in terms of compliance with laws and regulations. Companies also need compliance systems to ensure compliance with other formal requirements, such as contractual and procurement requirements and quality and certification standards. , These are the minimum requirements a business should have in place, and it is important that there is a formal process in place and dedicated personnel to ensure that the business remains fully compliant following any new regulations or legislation or changes in industry codes of conduct or in certification standards. We review compliance systems, include reporting to the board and external stakeholders, and recommend how these can be improved

Alignment  

Alongside its own internal principles and values, a business should seek to align itself with ESG/sustainability and corporate best practice. This may include voluntarily adopting trade association guidance, for example. Additionally, we advise on aligning with customer, societal and political expectations. For example, consider a business where there may be interaction with vulnerable customers and situations, such as within the financial services space; political, societal and customer expectations suggest  that a business should have suitable policies and processes to ensure responsible engagement with vulnerable customers, including ensuring that all customer-facing staff are trained to identify vulnerable people/situations, Not having an up to date vulnerability policy, training programme and protocols in place puts a business at a reputational as well as operational risk. For example, failure to identify vulnerable customers could mean that late payments from such customers could be pursued when ethical and financial considerations (e.g. low likelihood of repayment) may dictate a different course of action. We have advised several businesses on improving their approach to vulnerability.

Leadership

A business that leads within its industry on ESG issues can achieve competitive advantage. Such firms can inform and influence expectations, define best practice and shape the requirements for improvement within their industry. A leading business should not only have high levels of compliance but also be highly transparent about its compliance record and other measures of ESG performance, including complaints and health & safety, etc. It should publish its policies and processes online and communicate its governance, allowing customers and other stakeholders to understand and gain insight into its ESG strategy and performance and other aspects of its business. A business in a leadership position should also seek to raise standards in its sector through defining and sharing best practice and influencing sector codes of conduct and regulation.  A leadership position within their industry is a desired goal for many businesses and their investors, and GK’s assessment and practical recommendations are designed to help achieve this goal. We believe that companies should address ESG issues internally and across their sector, and we recommend and help implement strategies to help clients do that.

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