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TMA UK’s March event in London, kindly hosted by our sponsors BDO summary

20 March, 2024

For the TMA UK’s March event in London, we were kindly hosted by our sponsors BDO for a talk entitled “Applying an ESG lens to business risk in restructuring and turnaround situations”.

The presentation opened setting the scene on why the Restructuring industry needs to engage with ESG with the simple truth that ESG is only rising up the agenda and importantly is rising up the agenda of stakeholders to businesses.

It was noted that understanding your ESG position as a business and associated risks is vital and Tim House talked through how to consider risk through an ESG lens. He highlighted the importance of looking beyond the politically tarnished acronym ‘ESG’ to focus on the specific and relevant issues in each of those pillars. He demonstrated how these business risks have material, financial relevance to investors, lenders, customers/clients, and other influential stakeholders – the widespread, lived experience of the physical effects of climate change, socially-compromised supply chains, and weak governance arrangements, are influencing key business and finance decisions. This underpins why it is important to consider ESG risks and why stakeholders of businesses are increasingly engaged with ESG. The fact that 90% of enterprise value is now tied to intangible ESG-related assets means news stories in relation to ESG can have a huge impact on share price fluctuations because sustainability and ESG frequently underpins brand equity value.

The discussion moved to policy response from governments in response to the scale of the challenge facing society which is reflected in the raft of ESG-related laws and regulations and despite the political noise in this globally-important election year the problem will not go away and further regulations will eventually come into force.

The focus then moved to explain the importance of taking a logical and holistic approach when looking in detail at businesses to assess ESG risk and ensuring any approach is linked to credible conceptual frameworks. The key ESG performance indicators should be identified and assessed in the context of a broader IBR and ensure ESG is included in the scope of analysis. When a turnaround has been successfully engineered, consider the long-term value creation opportunities, keeping ESG firmly in mind when designing leadership & governance arrangements and ensuring it is embedded within the core business strategy. It is also important that ESG-related risks are incorporated within the ERM, and science-based metrics and targets have been set to track progress.

The session then covered some real life examples of how ESG has played a role in restructuring assignments. The first example a ceramic bottle manufacturer who had not identified the perceived ‘green’ profile of their product as a risk. They only realised this when their main customer terminated their contract to switch to a ‘greener’ product but by this time it was too late to engage and show how their product was in fact more environmentally friendly. The loss of this customer was fatal for the business but could have been avoided if the business had had an ESG mindset and engaged earlier with the customer.

Examples then moved to the Social and Governance aspects of ESG which are often overlooked. Useful examples were discussed in the context of assignments in the Education sector. This highlighted the conflicting priorities in an insolvency assignment between wellbeing and continuity of Education for pupils with the very clear and defined insolvency principles of financial value. This was clearly illustrated in the example of a special administration regime appointment over a college where the primary aim was to avoid or minimise disruption to the studies of existing students. This requires a change in mindset and approach and it was noted it will be interesting to see if more of these start featuring in our work.

In the conclusion to the session it was highlighted that the businesses we work with cover a broad spectrum of financial health. ESG provides opportunities for those looking to turn around to create value while for more stressed businesses along the decline curve it is about identifying and mitigating risk so you understand your position.

This was followed by some practical advice on the approach at BDO where the BDO ESG team offer an integrated solution working with colleagues across all Advisory service lines. In the Business Restructuring team the focus has been on embedding an ESG mindset with a useful analogy to Anti-Money Laundering and how this has been incorporated into our work. There has been a focus on identifying ESG risks when they take on a project through to training for all the team and ensuring it is appropriately incorporated in systems and processes for work delivery.

An interesting look forward from the Q&A session identified some key ESG-related themes that will become increasingly important:

1) the rapid rise of nature and biodiversity as a material consideration (e.g. the Biodiversity Net Gain rule that will impact the REC sector from 2 April this year),

2) human health (impacting labour markets), and

3) the governance arrangements needed to manage the safe and ethical roll-out of AI.

Please click on the PDF attachment above to view the presentation slides.