When planning a restructuring of a distressed business, the stakes are high and a keen understanding of the issues that need to be addressed is critical. While ESG considerations may not be the predominant focus, they can still have an important part to play.
Stakeholder support: Any successful restructuring will require support from relevant stakeholders, such as investors, lenders and customers, who will each have their own ESG propositions. A strategy that incorporates ESG elements may increase the prospects of obtaining the necessary stakeholder support – provided the rest of the restructuring proposition stacks up, of course!
Access to funding: Financial institutions are themselves subject to reporting requirements and recognise the importance of ESG strategies to markets and customers. It is our expectation that ESG metrics will become an increasingly important factor in lending decisions. This is also leading to new sustainable lending products, which reward, via favourable debt pricing, those businesses which perform well on ESG metrics.
Value enhancement: A strong ESG proposition can also enhance value. For instance, it can assist in attracting and retaining customers, lead to cost reductions (e.g. through lower energy consumption) and can encourage employee engagement, which is particularly important when trying to implement a successful restructuring.
Timelines and decision-making: ESG elements are also an increasing area of focus for potential investors when conducting their due diligence. Environmental issues of concern may include the organisation’s carbon footprint. Social issues may include product safety, and diversity and inclusion. Governance issues may include analysis of the organisation’s decision-making processes and its adherence to legislative requirements. Understanding the areas of likely focus for third party due diligence can help expedite what is often a time-critical process. When time is of the essence, a quick informed decision is better than a slow one.
Understanding supply chains: With reporting requirements only set to increase, and more organisations expressing ambitious commitments to ESG-related targets, we can expect to see pressure pushed down through supply chains. A supplier’s ESG credentials will become an area of increased focus in procurement and those that cannot meet expectations will lose out.
Risk mitigation: Breaches of ESG provisions can result in legal action. This can be very costly and distract focus from the core business. A proactive approach to ESG issues, risk mapping and obtaining expert advice can therefore assist in mitigating these risks.
Directors also need to consider the risks to them personally when discharging their duties. For example, while not widely relied upon in actions against directors to date, certain provisions of the Companies Act 2006 require a director to have regard to factors including the impact of the company’s operations on the environment when promoting the success of the company for the benefit of its members. It is not difficult to see how appropriate consideration of ESG factors should form part of meeting the relevant standard expected.
Failing to give sufficient consideration to ESG factors can have serious repercussions. A case in point is P&O Ferries, which sacked nearly 800 employees via Zoom without warning in March this year. This decision to hire a cheaper agency workforce in an attempt to address the financial pressures of the business resulted in a public backlash, civil and criminal investigations, and the potential of personal liability for directors. It’s an extreme example that highlights the issues well.
ESG affects every business: ESG covers a vast area and is of relevance to all businesses. A restructuring may present an opportunity to embed ESG into future strategy for business optimisation. In any event, relevant ESG considerations, even if they are not at the heart of what are often very difficult decisions, should not be disregarded.
Fiona McKerrell, leads Shepherd and Wedderburn’s restructuring and business advisory team.