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Integrating environmental, social and governance ESG issues in deals and valuing their impact www.pwc.com PwC’s Deals Webcast Series October 22, 2013
Integrating environmental, social and governance ESG issues in deals and valuing their impact
www.pwc.com
PwC’s Deals Webcast Series
October 22, 2013
2PwC
Administrative matters
• For better viewing experience, close all other applications
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• To print this entire presentation, click on the “Resource List” icon at the bottom of the screen
• If you have any questions throughout the live program type them in the “Q and A” box on the left side of your screen, then click the “Submit” button
• If you experience any technical difficulties during the polling sessions, reply to the question in the “Q and A” box
October 22, 2013
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CPE credits
In order to receive 1 CPE credit for this program, you must:
• Stay on for the entire 60 minute program
• Respond to the polling questions – you will be prompted to do so and need to respond to 4 questions
• Complete the course evaluation at the end of the program; and
• Click the “CPE” icon at the conclusion of the webcast – button is at bottom of your screen, then follow the subsequent prompts to submit and download the certificate. The certificate will open as a PDF file in Adobe Acrobat and can be saved to your computer.
• CPE cannot be awarded for participants not logged on to this webcast as themselves, phone-only participants, or participants who listen to the on-demand version. No exceptions.
October 22, 2013
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Moderator Presenters
Scott GehsmannDealsPartner
Andrew CristinzioPrivate EquityPartner
Lauren KoopmanSustainable Business SolutionsDirector
Tom KalinoskyDeals / SustainabilityDirector
Donna CoallierValuation Partner
Welcome and today’s speakers
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Today’s agenda
1. ESG issues are gaining traction
2. ESG is relevant in the M&A process
3. ESG is relevant to the IPO process
4. Valuing the impact of ESG
5. Q&A
6. Concluding remarks
7. Further resources
October 22, 2013
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1. Environmental, social, and governance (ESG) issues are gaining traction
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Translating Sustainability -- > into ESG valueSustainability is a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments.*
*Source: Sustainable Asset Management (Dow Jones Sustainability Indexes)
The quantitative and qualitative impacts of Environment, Social and Governance (ESG) factors are important considerations for transactions as well as recurring operations.
• Energy• Fuel• Water• Chemicals
Key Factors
Environment(E)
• Health & safety• Working conditions• Supply chain• Employee/stakeholder engagement
Social(S)
• Leadership• Internal controls / policies• Accounting standards• Compliance
Governance(G)
Cost savings
Risk mitigation
Value Enhancement
Why do it?
• Hazardous waste
• Forest products
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Monitoring ESG spend versus measuring ESG value
Governance
Social
Environment
11%
9%
14%
86%
73%
80%
Monitor Value*Source: Global PE Responsible Investment Survey 2013
October 22, 2013
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Risk management and investor interest are driving global ESG activity
Businesses are spending increased time and resources on ESG around the world*2013
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*Source: PwC Global PE Responsible Investment Survey
About the survey
• Received responses from 103 PE firms
• Conducted in May 2013 across 18 countries
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Investors have access to a company’s ESG data
• Bloomberg provides detailed information on companies’ ESG performance indicators
• Google Finance includes companies’ ESG scores on its “Key Stats and Ratios” snapshot
• NYSE and NASDAQ have joined the Sustainable Stock Exchange Initiative
• The initiative aims to improve corporate transparency and performance on ESG issues
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Polling question #1
What is the largest area of focus for your company’s ESG efforts?
A. Regulatory compliance & risk management
B. Operational efficiency and effectiveness
C. Revenue enhancement and other marketing-facing initiatives
D. All of the above are important areas of focus
E. Not applicable
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Companies vary in the stage of their ESG focus and progression; the value impact of each stage should be assessed in any transaction
Opportunity
Risk
Compliance and risk management
Eco-Efficiency Strategicadvantage
Where many organizations start
Operational risk
Regulatory compliance
Environmental liability
Where leaders are focused
Where some organizations are headed
Sustainability metrics
Cost savings
Environmental impact reduction
Brand enhancement
Product innovation
Stakeholder engagement
Risk Management
Cost Savings
Value Enhancement
Integrated reporting
Financial reporting
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2. ESG is relevant in the M&A process
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ESG plays a role throughout the deal process
Exit
100-day planning, improvement project
implementation
Exclusivity/completion
Due diligence / investment committee approval
Investment identification/appraisal
Risk Analysis
ESGAssessment
Objectives:
• Identify potential red flag risks that would impact bid (liabilities/expense)
• Evaluate ESG risks & future regulations• Assess customer and supplier risks
• Identify cost reduction (e.g. energy efficiency), revenue growth, and other value creation opportunities
• Evaluate environmental/social exposures & reporting risks• Design action plan & Integrate into 100-day planning process
Implementation
• Confirm and size top opportunities • Implement agreed-upon initiatives• Report risks identified, cost and environmental
improvements to target and deal team
ESGinputs
Deal continuum
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This impacts both buy and sell side – As buyers consider ESG implications, sellers need a story to tell.
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The first step is diligence on current ESG performance…all associated risks and opportunities
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Quality of Earnings Balance Sheet
Understand any ESG risks and exposures that may depress future earnings.
Understand underlying assumptions / differences in valuation of environmental remediation liabilities and environmental-related asset retirement obligations.
Material or unusual fluctuations due to the impacts of ESG-related accounting reserve adjustments, environmental recoveries, changes in accounting principles, and non-operating items.
Understand required ESG financial reporting (e.g. appropriate application of recognition and measurement principles, differences in US GAAP/IFRS) and impact on accretion/dilution equation.
Understand any potential cost savings (e.g. reductions in energy and water use, wastewater and hazardous waste generation, etc.) and top line impacts from ESG products/services that may reduce expenses and lift future earnings.
Understand any litigation actions and/or other third-party claims related to environmental issues, employees, product distribution or product use.
Additional Considerations
Purchase price adjustments arising from transfers in environmental liabilities and environmental-related asset retirement obligations.
Understand any debt covenants in relation to ESG exposures imposed by lenders and broader trends in the capital markets that could impact Debt/Debt-like items analysis.
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Companies unlock further value by including ESG in cost savings programs
What is it? Identifying innovative cost reduction opportunities through a sustainability lens (e.g. energy, fuel, waste, & water) by reducing consumption, increasing usage efficiency and unlocking incentives & rebates.
How can it drive value?
What are the key considerations?
Eco-efficiency
Social
• Safety incident improvement
• Supplier performance
• Employee engagement
Environmental
• Energy efficiency
• Fuel reduction
• Water use / leak reduction
• Waste monetization
1. Use a total project value creation approach when calculating benefits: Direct and Indirect
2. Embed green tax thinking into the capital budgeting process: Renewable Energy Credit (48) and Building Energy Efficiency Improvement Deduction (179D)
3. Implement a tracking & measurement system to capture and report project results
October 22, 2013
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Polling question #2
Do you plan to evaluate ESG considerations in any transactions (divestiture, acquisition, merger or IPO) you are planning in the next 12 months?
A. Yes
B. No
C. Not applicable
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3. ESG is relevant to the IPO process
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ESG is important throughout the IPO process
Being publicGoing publicReadiness assessment
• Objectively assess readiness
for going public
• Identify key ESG gaps and issues
• Determine ability to respond investor ESG requests, including providing data and program information
• Proactively identify and demonstrate the ESG value of your business
• Consider the appropriate disclosures of ESG risks and opportunities in SEC filings (Form S-1)
• Obtain greater assurance that the accounting and reporting of environmental obligations conform to accounting standards and controls under SOX 404
• Communicating the relevant ESG issues to various stakeholders (investors, credit agencies, public, etc.) during capital raising efforts
• Increased pressure from competitors and peers when comparing ESG performance
• Enhanced expectations for transparency & disclosure of non-financial data
• Stakeholder demands in terms of perception vs. reality of current ESG program
Public companies are managing and disclosing their ESG performance – setting the bar high for new entrants to the public market
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Attention, capital markets: The SEC is watching• Environmental and social exposures can be material in many sectors• Significant judgment is required to assess environmental and social
liabilities, and accounting & reporting practices vary considerably• The SEC is paying attention:
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Polling question #3
When considering a transaction, which of your stakeholders would be most focused on ESG?
A.Investors
B.Senior management
C.Boards
D.Bankers
E.Not sure
F.Not applicable
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4. Valuing the impact of ESG
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How do we value ESG?
In our view, ESG strategies and shareholder value need not be at odds. The shareholder value framework can be expanded in ways to accommodate the difficult-to-quantify benefits of sustainability initiatives.
October 22, 2013
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Polling question #4
If you aren’t currently valuing your ESG efforts, which of the following barriers is preventing you?
A. Lack of methodology
B. Lack of in-house expertise
C. Lack of senior level support
D. All of the above
E. Not applicable
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Q&A
Use the “Q and A” box at the bottom of your screen to submit a question.
We will answer as many questions as we can get to on the webcast, and we’ll reach out to anyone who asked a question we didn’t get to later on, after the broadcast.
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6. Concluding remarks
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Investor interest will rise in the next 2 years
Policy
80% have or are developing an ESG policy
Acquisition
71% frequently screen target companies for ESG risks and opportunities
Hold
50% regularly included ESG issues in the transformational plan
Exit
Only 36% regularly include ESG issues in the program for exit
Report
56% disclose ESG activity to investors
Investment Cycle
A snapshot of the present
Two years from now
Summary survey findings
80% expect the level of investor interest to rise
67% expect to disclose ESG activity
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In summary: Understand your ESG performance and communicate it effectively
Understand and measure
your ESG performance
Communicate ESG
performance effectively
• Identify material ESG risks and opportunities
• Determine which ESG issues will impact capital raising efforts
• Conduct an eco-efficiency assessment to locate opportunities that enhance EBITDA
• Review your cost estimating process for sustainability issues
• Reflect valuation of ESG factors in deal pricing
• Evaluate which sustainability disclosure risks affect the business
• Determine the full value of environmental liabilities and proper disclosure in the financial statements
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7. Further resources
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Download our latest publications
October 22, 2013
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For more information, visit our websites…pwc.com/us/sustainabilitypwc.com/us/deals
October 22, 2013
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Contact us
If you have any further questions about the topics covered in this presentation or divestitures, please contact:
Scott GehsmannDeals [email protected](646) 471-8310
Donna CoallierValuation [email protected](646) 471-8760
Lauren KoopmanSustainable Business Solutions [email protected](646) 471-5328
Andrew CristinzioPrivate [email protected](703) 918-1474
Tom [email protected](860) 241-7418
October 22, 2013
Thank you
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