December 2020

Henk Barnhoorn (CHIEF INTERNATIONAL BUSINESS OFFICER, CREATION GROUP | EXECUTIVE DIRECTOR, GLOBAL YIELD FUND)

“Business opportunities are like buses: there’s always another one coming ” Richard Branson. Truer words have seldom been spoken. With the official (measurable) private debt market now well exceeding $854bn (Pregin Ltd: Q2 2020 report on private debt) and overall sustainable investing expected to reach $150 trillion towards the end of 2030, how does an investment manager today select and invest in a sustainable manner?

Sustainability as a topic is vast, complex and challenging and with a host of elements ranging from guidelines (and/or laws), interpretations, measurements and reporting. No doubt most, if not all listed companies can soon be subjected to ESG audits or standards on top of the already long list of reporting and disclosure requirements (think about Sarbanes-Oxley 2002, implemented as a result of various corporate scandals).

There are many definitions of sustainability. To use BlackRocks definition: “sustainability or sustainable investing is about investing in progress, and recognizing that companies solving the world’s biggest challenges can be best positioned to grow. It is about pioneering better ways of doing business, and creating the momentum to encourage more and more people to opt-in to the future we’re working to create.” It certainly has a bigger impact than perhaps the first selected version i.e. “sustainability in businesses is the ability to be socially and environmentally responsible with transparent initiatives and disclosure in parallel with the lifespan of the business”. It is not only about the bottom line.

At Creation Capital, a Finance House that specialises in providing sustainable credit finance solutions (defined as “the provision of tailor-made finance, structured by utilising an optimum mix of financing alternatives, resulting in a flexible finance package where the cost is a function of business performance and where our clients become members of our hands-on finance community”). We, as many others, are now continually faced with the challenge of defining what “sustainability” means and how do we facilitate sustainability challenges in our day-to-day business. There is no doubt that the pressure on companies to become more environmentally, socially and governance responsible, has been kicked into another gear due to COVID-19. Investors are also demanding that funds are to be invested in environmentally and socially responsible companies with sound governance. They want their funds to contribute to a higher goal, not just to the bottom line. Investment companies should therefore adapt and adopt the same approach and philosophy. As a Finance House we set a goal to structure our solutions in a sustainable manner and invest in sustainable companies.

Where do we start as an investment company?

Where do you start when analysing your client or target, from an environmentally, socially and governance perspective (so called “ESG”), before placing or investing funds? Various studies conducted and literature on this topic concludes that the characteristics of a company Board are key elements that can lead towards increased sustainability. Whilst this is only one element in the ESG “checklist”, it prompted a closer look at these interesting studies and findings.

The chart below shows six key characteristics of a Board that were identified, together with the level of impact they have on sustainability:

Source: M Barnhoorn who compiled this data from various articles and studies around Boards and sustainability

 

Key findings on some of the higher-ranking characteristics are:

• Diversity: the characteristic most referred to in the literature reviewed refers to diversity. Under diversity the focus was particular on the inclusion of women, as well as members with a higher level of education on the Board. Some of the researchers (Orij 2020, Hussain et al, 2016, Fakir et al 2020 and Aman et al 2018) believe women are more focussed on social issues, including the need for disclosure and reporting. The thoughts are also that board members with an higher education create the capacity for a deeper understanding of the environment and the social issues the world are facing as well as a better understanding of how technology could be used with the increase in sustainability demands. One could perhaps conclude with the old C.S. Lewis saying that “two (“diverse”) heads are better than one” – a more diverse board can lead to more, better and deeper ideas regarding sustainability.
• Environmental Committee: although perhaps not a “characteristic” in the true meaning, this topic was frequently mentioned (Martin & Herro, Shahgholian, Fakir et al, Hussian et al, Biswas et al and Chams & Garcia-Blandon) and is considered to be a key independent variable that, in a positive manner, affects the overall sustainability of a company- perhaps not a surprise. We are so used to the concept of the Audit and Risk – , Compliance- and other sub-committees, that not having this dedicated skilled committee or function will definitely place a question mark on the seriousness of a Companies’ ESG approach and commitment. Having such a committee, that should in essence consists of the relevant skills and experience, not only shows commitment towards adopting a ESG policy and framework, but also more importantly will result in a monitoring, executing and reporting (disclosure) of the stated ESG actions.
• Leadership, independence and segregation (Chair and CEO): most of these traits or skills (in the case of leadership) were referred to in the literature. The traditional focus on bottom line growth as creating shareholder value is changing fundamentally (the increase in so called sustainable investing should convince us). The successful implementation of this change of stakeholder and shareholder demands requires leadership; both from a CEO and a Board, with sufficient segregation of roles and an independent perspective. The statement is made that sustainability could have more room for success when there is more independence and authority between roles and functions. We place a high importance on the trait “leadership”, but at times measuring this is difficult and requires a proper understanding of the individuals at the helm of a company (one of the so called “fundamentals” when analysing a client). No matter if the business is public or private, small or large, the execution of its strategies, its believes and for us the, company’s DNA starts with leadership. A leader, with no level of independence (e.g. a ESG committee in the case of public or large companies), and with sole “control”(Chair vs CEO) could defy all of the investors, stakeholders and ESG demands.

Analysing the Board of a potential investee is very well part of the starting point in an ESG due diligence, as ultimately the role of the Board is to meet the requirements and protect the interests of external and internal stakeholders. Based on an article featuring the world’s most sustainable companies, as per Iman Gosh – March 2020, which reports the outcome of various research, data and indicators, it was interesting to note that the top three identified, most sustainable companies (all from the Nordic countries), all portray the identified Board characteristics, with the exception of a dedicated Environmental committee – a norm to be expected in the near future?

We very often find that research is based on large and listed corporations. The question of “how do we put in place the same rules for the small and medium enterprise markets?” always remains, as they have an equal role and responsibility in the success of the future sustainable world.

At Creation Capital we are, and will be exposed to a variety of investments opportunities. With our overriding principle of following a binary ESG approach, putting in place a sustainable finance solution for both our investors and investees, starting with a deep analysis of the Board, its leadership and management, ranks as a top priority.

About Creation Capital

Creation Capital is a boutique specialist Finance House committed to providing an environment for sustainable Wealth Creation. Founded and rooted in Africa, the Group, with a presence in the Netherlands has as its core focus that of tailor made, structured finance that generate sustainable and attractive returns for ESG sensitive and conscious investors.

For more information visit creation-capital.com

Contact: info@creation-capital.com