by GK Strategy 27th February, 2019
3 min read

How do you assess purpose through ESG due diligence ?

Purpose continues to be a major theme for investors – from a corporate success and ESG perspective, but how investors can best assess it is less certain.

The quality of a company’s purpose should not be assessed in terms of it being another way to articulate mission or business strategy. A good company purpose needs to answer the question ‘what higher purpose do we serve beyond making profits?’

BlackRock’s 2019 letter to CEOs reiterated their 2018 letter’s strong and much-reported message on purpose:

‘Purpose …is a company’s fundamental reason for being – what it does every day to create value for its stakeholders. Purpose is not the sole pursuit of profits but the animating force for achieving them.’

Purpose is not something than can be readily identified through standardised due diligence questionnaires. Ticking a box to indicate that a company has a statement of purpose gives little indication as to whether senior management embraces that purpose or whether it is shared by company employees.

BlackRock’s Investment Stewardship approach to engagement with companies on strategy, purpose and culture outlines useful steps that investors can take, such as discussing board and employee involvement in shaping and monitoring purpose.

However, assessing purpose is more challenging in a due diligence phase of an SME where there may be no formal board or long-term strategy or statement of purpose.

The formally articulated purpose of a company (of the type that can be on corporate websites or documents) can be less important than the shared sense of purpose that often animates SMEs, especially where the senior management has been with the business since its early days.

This is why it’s important to have open discussions with senior management in the due diligence phase and not overly focus on questionnaires or data rooms. Many senior managers’ sense of purpose emerges most clearly when asking them why they did or didn’t do something.

For example, a decision not to use freelancers to engage with potentially vulnerable people – and to use only well-trained full-time staff – may not be explicitly connected to a stated company purpose. But the connection might only emerge when discussing why that is done, e.g. it may stem from a determination to be the most professional and ethical company in a sector.

Similarly, companies many not use certain types of marketing or branding, not because they contravene internal guidelines or any company statement, but because they feel that it is at odds with how they want to see the category develop.

Some discussions of purpose are too narrowly focused on branding, communications and company values, rather than on how the company sees its wider purpose in, for example, professionalising its sector or developing key categories in a more sustainable or ethical direction.

Standardised, generic ESG questionnaires – and the limited discussions that can arise from over-reliance on them – cannot capture purpose well. This is why GK takes time to know an asset and its sector – and in discussion with key company personnel and other stakeholders – in its due diligence.

A strong sense of purpose is often a stronger force for positive change than even the most sophisticated policies, processes and governance. Due diligence needs to reflect that.

For more information on how GK approaches ESG in its due diligence and advisory services, please take a look at our ESG services page.

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